Financial, Real Estate, Stock Markets Trends and Current Affairs

Let's face it: Traditional Cell Phone Usage Is So Old School!!!Observations on AT&T and US cellular business in general, per the CNBC stock picking exercise...

• The company has been making slow but steady growth in its revenues and profits
• The US market is nearing saturation, resulting in increased competition with Verizon Wireless and Sprint Nextel Corp. This cannot be over-emphasized, since mobile computing growth is THE place to focus energies and resourced for at least the next 5 years. Google's Android has allowed companies to tranform dead industries by making use of Google's negative margin tech and business model to jumpstart failing business models. A perfect example of this is Barnes & Noble. @paidContent: At $1.7B, Nook's worth more than Barnes & Noble itself - as per GigaOm:

Microsoft and Barnes & Noble have buried the patent hatchet and teamed up to compete against Apple and Amazon in the eBooks business. The new partnership sees Microsoft investing $300 million in a new Barnes & Noble subsidiary. (My colleague Laura Owen has the complete breakdown of the deal over on PaidContent.)

The $300 million investment in the  Nook subsidiary of Barnes & Noble gives Microsoft about 17.6 percent ownership of this  business unit. That values, this business at about about $1.7 billion. Before the markets open this morning, the Nook business was valued about $900 million more than Barnes & Noble itself.

Update: Barnes & Noble stock zoomed at the opening bell – and is now trading at about $9 a share, giving Barnes and Noble a total market cap of $1.3 billion — which is still less than the Nook subsidiary itself.

• Net attributable income rose to $3.6 billion, or 60 cents per share, from $3.4 billion, or 57 cents per share in the year-ago quarter.
• Consolidated revenue rose nearly 2 percent to $31.8 billion
• The company has been witnessing growth in its ARPU and subscribers numbers, although moderate.

1. 1.  The U.S. mobile provider added 187,000 subscribers in the quarter
   2. Average monthly revenue per AT&T contract subscriber, or ARPU, increased 1.7 percent to $64.46

Stock performance (YTD:  +3%, 6M: 12%)

US carriers need to reinvent themselves, and they need to do it yesterday. Webiste Mobithing.com share with us...

1) There are now 1.2 billion mobile Web users worldwide, based on the latest stats for active mobile-broadband subscriptions worldwide; Asia is top region.

This means there will soon by more business on handset communictions then there will be in the desktop business.

2) South Korea and Japan lead in mobile broadband penetration with 91 and 88 percent respectively.

This means there's plenty of room for the US to grow. The only question is how?

3) Mobile devices account for 8.49 percent of global Website hits.

Here's an opportunity right here, but will the staid management of cellular carriers see it to capitalize on it.

4) Many mobile Web users are mobile-only, i.e. they do not, or very rarely use a desktop, laptop or tablet to access the Web. Even in the US 25 percent of mobile Web users are mobile-only.

BINGO!!! Carriers should not be looking to be the traffic tolls or gatekeepers of mobile content (which is there current mindset). They should be aiming to be THE content, as well as the end to end enablers of such: apps, media, intelligence and all.

5) The drivers of mobile Web and mobile media are:
(i) Web-enabled handsets - by 2011, over 85 percent of new handsets will be able to access the mobile Web. In US and W. Europe, it is already surpassed that. Lots of new handsets support 3G (fast Internet).
• N.B. smartphones are only a fraction of Web-enabled phones.
(ii) High-speed mobile networks - almost one in five global mobile subscribers have access to fast mobile Internet (3G or better).
(iii) Unlimited data plans - Widespread availability of unlimited data plans drove mobile media in Japan, now it’s driving the US; but in W. Europe, lack of availability is holding up progress.

Re: (i) Carriers DO not think outside the box. One of the CNBC stock draft contestants recommended RIMM his top pick. While I don't agree with him, per se, the value in RIMM and Nokia is certainly there for those players who need a massive strategic boost in this mobile computing game, translated as EVERYONE besides Google and Apple. The only one who seemed to have gotten the message was Microsoft when they purchased (synthetically) Nokia, and recently part of the Nook Franchise. Deutsche Telekom should look into TMobile buying the assets out of RIMM and specializing in end to end enterprise solutions as well as consumer prodcuts right outside of the feature phone level. That's where the growth will spurt, as the rest of the world graduates from feature phones to full fledged smartphones.

Re (ii) and (iii) Instead of creating ingenious ways to force people to pay for things they already have been trained against paying for (and therefore may ever pay for), the telcos should look into adopting Google's methodology of cross subsidizing  high demand services with revenue from SMBs and institutions. Basically, Google cost shifts. They take revenue from adSense and use it to fund gmail, etc.

Telcos should create real, attractive, functional and useful apps/cloud systems and bundle them tightly into their services. As the front end, they have an advantage and if they do a good job, not only will most not bother to avoicd said service, but will actually opt for said service while recommending the same to their friends. Why in world didn't AT&T or Verizon create Dropbox before there was a Dropbox? Even if they didn't have the creativity, they could have simply bought Dropbox.

Yes, the business would have driven high bandwidth usage, but isn't that would they would have wanted???? Don't they sell bandwidth? A viral campaign and cost shift strategy of offereing free storage AND a free week of cell service/data plan for every Dropbox referral customer successfully signed up would have made Sprint a number carrier and data service provider.

A web-based office front end would have rounded out the deal, ex. buying web-based company like Think-Free office, you know... Just like Google did. They same viral offers could have applied. Selling a packaged cloud-based voice mail system could have had Sprint profiting from Verizon and AT&T accounts they don't even have to pay the infrastrcuture for. A good example would have been Grand Central, which Google bought and turned into Google Voice. Spint could have done this and sold it not only to its customers but to Verizon, AT&T and T-mobile customers as well. Making money from all angles, again with that viral marketing slant.

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Just a day or two after describing the extreme undervaluation of Google shares on CNBC, Google releases its cloud storage platform - Google Drive. For those who may not comprehend the significance of this move, Google has now entered (with both feet planted firmly on the ground) the enterprise, SMB and consumer cloud business in a profound way that it has never done before.

Before Drive, Google was arguably the most prolific cloud computing company for the masses and making inroads towards the enterprise. Now, with 16 TB plans, it plans are literally deadly to the competition and clearly show that this is no mere online ad agency and/or search company. The key to Google's dominance in cloud computing and the SMB/enterprise space is its massively successful mobile initiative. Wait! I'm getting ahead of myself. Let's take this from the beginning...

Google is known as the world's larges and most successful internet search engine. As a result of it's massive search reach, it has enabled automated, DIY web advertising, a business from which it derives most of its revenues and profits. This automated advertising model is low cost, high volume, high margin - a combination made in investor heaven. Of course, nothing lasts forever, and although the business and its margins are still growing at a healthy clip (see Google 1Q 2012 Earnings Update), nothing lasts forever. Google's astute management is well aware of that and branched out into mobile heavily about 5 years ago with its successful, yet oft misunderstood Android buisiness model as referenced by the piece I penned two years ago (yes, this business model and opportunity was obvious and evident two years ago) - Android Now Outselling iOS? Explaining the Game of Chess That Google Plays in the Smart Phone Space:

Many commenters are lamenting on the fact that Google is not making money on Android sales since the OS is given away for close to free while Apple is making $250 per handset sold. Those who are looking at it from this perspective are missing the forest due to that big fat tree that is in their way! Yes, Apple is making a killing on its iPhone sales, and it would be difficult to attempt to catch them with a fat margined product. They have managed to produce both margin and volume and have wrapped it up with extreme customer loyalty. What the armchair pundits are missing is the power of reach. Google is developing massive reach, and developing it ridiculously quickly. A byproduct of this reach is the commoditization of the smart phone platform which will probably cut the fat margined business model off at its knees. That is not to say that Apple will be cut off at the knees, but they will have to alter their business model for the competitor-less margin that they enjoyed for the last three years will no longer be a given. It also means that anyone else reaching for the crown (including Apple) will have to spend more upfront to gain less per unit sold. This actually benefits Google, for they are not in the hardware race, yet they benefit from each and every handset, tablet, desktop and automotive unit sold. Google is trying to become the new Microsoft!

In the meantime, Google ramps up the potential to push software as a cloud service, downloadable software and interactive, activity/context sensitive rich media ads and services to hundreds of millions of new users. This opens up a phenomenal opportunity for Google, and it appears as if many are missing the point because Google (wisely) decided not monetize it immediately, but to let it gestate and grow. Do you remember 15 years ago when many felt the same about search and the fact that Google wasn’t making any money providing search (pre-advertising)? Now this is not to say that Google is going to win the Smart Phone Wars, although at this point Google looks like the number one contender (IMO, Apple, Google and Microsoft are the ones to look out for).

Google now derives approximately $2.5 billion in annual revenue from mobile advertising, and that is from nearly all platforms, not just its market dominating Android platform. Remember, Google is not longer a simple ad company though. Mobile searches have quadrupled in the last year, for many items one in seven searches are now mobile. Approximately 71 percent of smartphone users that see TV, press or online ad, do a mobile search. This puts a significant amount of power in the hands of those companies that can control the mobile platform. 

Many mobile Web users are mobile-only, i.e. they do not, or very rarely use a desktop, laptop or tablet to access the Web. Even in the US 25 percent of mobile Web users are mobile-only.

Popular media would have one believe that the mobile opportunity is in mobile apps, and indeed, over 300,000 mobile apps have been developed in three years. The site mobithinking.com states apps have been downloaded 10.9 billion times, but demand for download mobile apps is expected to peak in 2013. The most used mobile apps in the US are games; news; maps; social networking and music. Facebook, Google Mapsand The Weather Channel (TWC) are the kings here. Mobithinking.com compendium research asserts the average download price of a mobile app is falling rapidly on all vendor app stores, except Android. And 1 in 4 mobile apps once downloaded are never used again.

So where is the opportunity? Commerce and the cloud!!! Again, as sourced from Mobithinking.com:

Mobile payment, NFC, m-commerce, m-ticketing and m-coupons

1) Paying by mobile i.e. m-payments will be worth US$240 billion in 2011 and could be over US$1 trillion by 2015. Purchasing digital goods is the largest segment ahead of physical goods, near-field communications (NFC), m-banking and money transfer. Biggest market today is Japan, but in the future could be China.
2) Japan sets the precedent for m-payment 47 million Japanese have adopted tap-and-go phones, but is expected to take off elsewhere as the world adopts NFC. In China alone, there will be 169 million users of tap-and-go payments in 2013.
3) M-commerce is predicted to reach US$119 billion in 2015, Japan remains king. Top m-commerce retailers globally include: Taobao, Amazon and eBay. The US m-commerce market will be US$31 billion by 2016.
• 1 in 8 mobile subscribers will use m-ticketing in 2015 for airline, rail and bus travel, festivals, cinemas and sports events.

Who is at the forefront of NFC enabled mobile hardware? You guessed it, Google. As a matter of fact, Android handsets are the only handsets sold stateside that feature NFC (near field communication) capabilities needed for this new form of mobile commerce. Now that we're discussing it, whose software/firmware financial transaction platform has the biggest headstart, by far? You guessed it again - Google and their Google Wallet.

This brings us back to reach. Google's Gmail has approximately 350 million active users! Gmail is now tightly integrated with ALL of Google's cloud services. Thus, if you use one of them, chances are you will be, if not already doing so, using much of the rest of them. 350 million is an impressive number, yet even this impressive number looks to be outdone by the juggernaut that is Android. Asymco.com posed the question, When will Android reach one billion users?

The latest data from Google shows that the Android activation rate is increasing at a relatively steady rate (i.e. acceleration is constant). The data provided so far is in the blue circles below. The green line is the interpolation and extrapolation of that data.

As the graph is projected forward we get an activation rate of one million per day by mid August of this year. If it continues then we could see 1.5 million per day by end of 2013.

The corresponding number of cumulative activations is shown on the following log chart (with blue circles showing the actual data and the green estimates.)

The forecast is therefore that Android activations will cross one billion by November 2013.

The following chart compares the growth ramps of the various mobile operating systems indexed from the same starting points (measured in quarters after launch).

If Android does keep accelerating at the same rate then it will reach a billion users in five years....

 These numbers are phenomenal, but what do they mean in the context of Google's share price. Well, this brings us back to Google Drive as an example...

Gogole_drive_pricing

200 GB is consdierably larger than most endusers desktop storage capacity. Assuming in 2013, at a billion users, Google is able to convert 2% to paying consumer retail drive clients (this number is ridiculously conservative as anyone who has used Dropbox can attest) and .03% to SMB/enterprise clients (again, ridiculously conservative).

As you can see, Google drive represents an additional $4.2B in revenue alone. This does not in anyway take into consideration the additional network effect revenue knock-ons that will assuredly accrue in Google's favor, ex. Google Docs adoption, Google Voice usage, synergistic Android handset sales, and last but not least higher ad revenue from higher usage as users share files with friends who are not paying subscribers. Add on mobile commerce, and the dozen or so other NEW Google franchises and you can see that valuing this company as a search engine provider is downright foolish. 

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade. 

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

Google Q1-2012 Valuation Summmary 04/20/2012

Google Q1 2011 results 04/18/2011

Google Q3 2010 reveiw 11/08/2010

Google Final Report 10/08/2010

An Analysis and Valuation of Google's Android and AdMob 09/27/2010 

Google Valuation Model 09/21/2010 

 Google's VOIP and Telephony Services 09/16/2010

Google Cloud Based Services

Google TV Analysis

A couple of bits from our archives...

This is part 2 of my rundown of the stocks covered on CNBC street signs yesterday.  Look here and here for the intro (with Apple analysis) and part one.cnbc_draft_pick_headbust

I will continue snapshots and opinions of all of the other companies (excpt the oil company) in two separate posts. 

Relate Video 

Reggie Middleton on CNBC Stock Challenge... I'm at 5:28 discussing Google.

Additional commentary and footage...

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For those who didn't see the CNBC Streetsigns show yesterday, I have put together a brief (often not so) fundamental overview of the stocks that were available for drafting in during the airing, along with my comments and opinions. Yesterday I released the analysis of Apples Q2 earnings, and I'm sure it contained content that you didn't read anywhere else.

 cnbc_draft_pick_collage

Here’s the list of stocks:

• Apple: Reviewed in depth and in detail yesterday. For those who do not subscribe, I suggest you ask a friend who does to share with you the difference between last month's valuation note target price (page 10 of  Apple Margin & Valuation Note) and the price of Apple today, the day after earnings (just the difference, mind you - no giving away the BoomBustBlog content for free). Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. Subscribers, please download  Apple 2Q2012 results analysis.
• Starbucks: 
  • The company is expected to benefit from
    • Continued momentum and dollar share gain in the K-Cup segment
    • Ramp up of multiple key revenue drivers
    • Moderation of coffee prices, benefiting future margins. Coffee price have fallen 37% since hitting a 10 year high on 3rd  May 2011
  • • The Company is entering into strategic partnership in different location; is seeking expansion in emerging economies including China and India
    • The stock ($59.5) is close to 52- week high ($ 62.0)
    • Starbucks Sales in China Contribute to Earnings Rise: New York Times‎ - 11 hours ago Earnings increased 18 percent to $309.9 million, or 40 cents a share, in the second quarter, propelled by more traffic in its stores and big
    • Starbucks announced that it continues to target approximately 10% revenue growth, driven by mid-single-digit comparable store sales growth in fiscal 2012
• Priceline.com:
  • S&P upgraded the company to ‘BBB’ from ‘BBB-‘
  • Priceline business model of offering discount travel rates on car rentals, hotels, and flights has helped it stay afloat despite a weak U.S. economy and a slowdown in Europe
  • Company fourth-quarter net profit was $226 million, or $4.41 per share, compared with $136 million, or $2.66 per share, a year ago
  1. 1. Bookings gained more than 50 percent from a year ago.
     2. 80% of operating revenue came from outside US, the company still has room left to run in emerging markets like Asia and Latin America
  • High growth and steady margins are strong positives for the stock
  • The recent launch of its Booking.com Tonight application is getting a lot of attention from travelers who book hotel reservations or car rentals at the last minute
  • The company’s business model is less resilient to the current economic turmoil
  The stock is continuously performing despite negative economic conditions (YTD:  +55%, 6M: +43%)

I will continue snapshots and opinions of all of the other companies (excpt the oil company) in two separate posts. 

Relate Video 

Reggie Middleton on CNBC Stock Challenge... I'm at 5:28 discussing Google.

Additional commentary and footage...

ZeroHedge reports: S&P Cuts Spain to BBB+, Outlook Negative :

Adding insult to Bayern Munich injury, we just got S&P which did the impossible and cut Spain to BBB+ from A (outlook negative) not on Friday after hours. Kneejerk reaction is a 30 pip drop in EURUSD. Oh, and most amusing, those witches among men, Egan Jones, downgraded Spain from BBB to BBB-.... a week ago. Crush them, destroy them... How dare they be ahead of the pack as usual: after all their NRSRO application was missing a god damn comma.

Full release:

• • We believe that the Kingdom of Spain's budget trajectory will likely deteriorate against a background of economic contraction in contrast withour previous projections.
  • At the same time, we see an increasing likelihood that Spain's government will need to provide further fiscal support to the banking sector.
  • As a consequence, we believe there are heightened risks that Spain's net general government debt could rise further.
  • We are therefore lowering our long- and short-term sovereign credit ratings on Spain to 'BBB+/A-2' from 'A/A-1'.
  • The negative outlook on the long-term rating reflects our view of the significant risks to Spain's economic growth and budgetary performance, and the impact we believe this will likely have on the sovereign's creditworthiness.

As was clearly stated last Monday and warned two years ago on BoomBustBlog...

The Spain Pain Will Not Wane: Continuing the Contagion Saga:

In the general our analysis Spain public finances projections_033010, the first four (of 12) pages basically outline the gist of the Spanish problem today, to wit here are the first two:

Spain_public_finances_projections_033010_Page_02

About those rating agencies... 

Of course, we all know how reliable and timely the rating agencies are, right? See Rating Agencies vs Reggie Middleton, Part 3 and the Interesting Documentary on the Power of Rating Agencies, with Reggie Middleton Excerpts

I am having my analysts work on the Spanish and Italian default/ bailout scenario now (we have worked up a scenario two years ago, but things are much worse now). Even a Citi analyst has chimed in to that effect. Let' not forget the Portuguese Liquidity Trap: Prime from the actions of Greece. As a matter of fact, it's evident that Greece Is Trying To Convince Portugal To Make FIRE Hot, hence I answered the inevitable question, So, What's The Next Step Towards The Eurocalypse??? 

Okay, it's time to review Apple's earnings. It's interesting that so many in the street and off are coming around to my way of thinking regarding Apple. To me that means that fundamental analysis is starting to return. I have had more hedge funds request Apple research than at any time in my site's history.  Before we move on to the Apple analysis, I want to inform all that I will be discussing this on air live today in the “CNBC Stock Draft 2012” live on @StreetSignsCNBC, 2:30 pm ET, hash-tag: #cnbcstockdraft2012

cnbc_draft_pick

Here’s the competition:

• Josh Brown – SHAOLIN STOCKPICKERS
• Abigail Doolittle - DOOLITTLE'S DO-A-LOTS
• James Altucher – THE BOOM TEAM
• Reggie Middleton – TEAM BOOM BUST
• Pete Najarian – THE PONY EXPRESS
• Paul Hickey – B.I.G. MONEY
• Guy Adami – THE OUTSIDERS

Here’s the list of stocks:

• Apple
• Starbucks
• Priceline.com
• Mastercard
• Dollar Tree
• Facebook (You buy the stock POST IPO .. you don’t get it at the IPO price…must buy at first day closing price)
• Google
• AT&T
• Johnson & Johnson
• Dell
• Microsoft
• Coca Cola
• Exxon Mobil
• McDonalds
• Groupon
• JC Penney
• Netflix
• Best Buy
• RadioShack
• RIMM
• Green Mountain Coffee

On that note, its time to review Apple's Q2 results. Subscribers, please download  Apple 2Q2012 results analysis.

In short, we significantly underestimated the international sell through of the iPhone, as did much of the sell side. We were off, and wrong on that part and although there was significant internal discussion on raising estimates, the work that went out was not what it should have been. I mention this because we are consistently more optimistic than the sell side in terms of units shipped, thus more accurate come earnings time. This quarter was a snafu. I also mention it because I tend to be a perfectionist and the deviance between the actual results and the projection should have been minimized. With that being said, the logic behind the added caution is still quite valid. 

For all of those near fanatics who do not subscribe, I suggest you ask a friend who does subscribe to share with you the difference between last month's valuation note target price (page 10 of  Apple Margin & Valuation Note) and the price of Apple today, the day after earnings (click here to subscribe).

As excerpted: 

It is worth noting that the key assumptions that underline the above valuations – (1) iPhone continuing to witness stupendous growth *******  in 2012 and ****** 2013 over a larger base and (2) iPhone margins continue to remain healthy off stable prices and despite increase in material cost – should be keenly watched over the next couple of quarters. 

Then ask them bout the logical argument behind the concern with Apple and the extremely volatile price action of the last few weeks. As stated many times in the past, The BoomBustBlog argument and analysis is solid.

What else is there to the earnings announcement? Well we were absolutely correct in terms of the oncoming margin compression of the the product lines, something that was actually easy to see coming but many refused to admit. Of course, there will be those select few that say, "But wait, the company reported an INCREASE in margins while you said there will be a decrease!". Yes, that's true and both can exist simultaneously.

Apple_2Q2012_results_analysis_Final_Page_2

Apple_2Q2012_results_analysis_Final_Page_3

Apple_2Q2012_results_analysis_Final_Page_4

 I will discuss nearly all of the stocks in the CNBC stockpicking list above in the next few posts on my way to studios via BoomBustBlog and ZeroHedge. Comments are always welcome. Follow me:

Bloomberg reports U.K. Plunges Into Double-Dip Recession, as does CNBC, UK Back Into Recession in First 'Double Dip' Since 1970s:

Britain's economy slid into its second recession since the financial crisis after official data unexpectedly showed a fall in output in the first three months of 2012, piling pressure on the embattled coalition government.

My contention is that the UK has not fallen back into recession, but has never truly risen out of the last one. Accounting parlour tricks, financial engineering machinations and outright verbal sleight of hand (what some may call not telling the truth) has given the illusion of organic growth, but in reality and at best, it was simply buying $1.00 worth of growth with $1.20 worth of stimulus - or should I reference this in pounds.

As we clearly articulated two years ago, when it was alleged that recession was over, in the subscriber (click here to subscribe) document  UK Public Finances March 2010:

 UK_Public_Finance_Analysis_2.0_Page_01_copy

UK_Public_Finance_Analysis_2.0_Page_02

UK_Public_Finance_Analysis_2.0_Page_03

Reggie_Middleton_Facebooks_Valuation

The MSM is echoing BoomBustBlog analysis today, as per Bloomberg: Facebook First-Quarter Profit Drops; Costs Almost Double

Facebook Inc. (FB), the social network planning an initial public offering, said first-quarter profit fell 12 percent as sales growth slowed and marketing costs more than doubled. 

This is exactly as I warned in my initial Facebook analysis to subscribers - The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly... 

Sales had risen 55 percent to $1.13 billion in the fourth quarter, and net income had climbed 20 percent.

Thus, it is highly unlikely one can legitimately factor in the type of growth needed to justify the current Goldman $50B valuation - particularly when you consider that Facebook's growth is already slowing!

Now, back to the Bloomberg article...

Net income dropped to $205 million in the three months through March, Menlo Park, California-based Facebook said yesterday in a regulatory filing. Sales climbed 45 percent to $1.06 billion, a slowdown from 55 percent in the December period.

“Facebook has a pretty steep hill to climb to meet the expectations that we set out,” Williamson said.

Facebook may seek an IPO valuation of $75 billion to $100 billion, people with knowledge of the matter have said. The upper end of that range would value the company at about 25 times trailing 12-month sales, more than double Google (GOOG) Inc.’s valuation when the search-engine operator went public in 2004.

Before last quarter, Facebook’s sales were already projected to gain at a slower rate this year than Google’s at the time of its IPO, according to data compiled by Bloomberg. At $6.1 billion, 2012 revenue would be 64 percent higher than the $3.71 billion reported in 2011. Google’s revenue more than doubled to $3.19 billion the year it went public.

Zynga Revenue

Facebook said 82 percent of its revenue came from advertising last quarter, down from 83 percent in the preceding period. The company also derived less revenue from gaming companyZynga Inc. (ZNGA), which contributed 11 percent of the total in the quarter, down from 13 percent a year earlier.

The number of daily active users rose to 526 million, an increase of 41 percent from a year earlier. Facebook’s employee base rose 46 percent to 3,539 from a year earlier.

“Our costs are growing quickly, which could harm our business and profitability,” the company said in the filing. “Providing our products to our users is costly and we expect our expenses to continue to increase in the future as we broaden our user base, as users increase the number of connections and amount of data they share with us, as we develop and implement new product features that require more computing infrastructure, and as we hire additional employees.”

The paragraph above, decoded: These expenditures are true expenses, and not actual investments for they are needed to keep the company above water in the competition with Google, et. al., and are the stuff that actually fosters long term growth.

From C|Net:

 Its first-quarter revenue rose 45 percent to $1.06 billion compared with a year ago, but it was down 6 percent compared with the last quarter of 2011.

At the same time, the company's net income for the first quarter fell 12 percent, to $205 million from $233 million a year ago. And it was down from $302 million in the fourth quarter of 2011.

That drop in quarterly revenue and profit comes even as Facebook continues to see big user growth, meaning that it's making less on each user. Facebook said that it now has 500 million daily active users, compared with 372 million a year ago, and that its monthly active user number -- people who use Facebook at least once a month -- has climbed to 901 million from 845 million in December.

Its average revenue per use, called ARPU, fell 12 percent from the fourth quarter of 2011, and Facebook said that was mainly due to "seasonal trends." The company points out that it saw the same seasonal weakness during the fourth quarter of 2010.

Even more telling are the comments from that article...

15% of revenues came from Zynga...and that stock's not looking too hot these days. For those on the fence about whether this is a worthwhile investment, consider the last time you actually clicked on an ad in FB.

Posted by techgeekdude 

I am a once-a-month FB user at most. If FB is making any money off of me they are ripping off the one paying them that money. I may be counted as a visitor, but I am worthless to FB and anything connected to them as I cause no $s to pass their way.

Posted by UnderStress 

I discussed Facebook on the Peter Schiff radio show yesterday. The entire show can be heard via podcast from his site, and the Facebook excerpt is below...

From my previous Facebook analysis public excerpt:

Yeah, I was on a roll last year, wasn't I? That's not the gist of it either, as we reminisce even more...

Additional Facebook analysis, valuationa and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Of course Facebook enthusiasm is burning hot. The coals in the "investor" (and I put this lightly) fire are being stoked by none other than the sell side agents doing God's work, among others...

Professional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update. It is recommended that subscribers (click here to subscribe) also review the original analyses (FB note final 01/11/2011) as well as the following free blog posts on the topic:

1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

Roughly two years ago, I penned a piece called How Greece Killed Its Own Banks! It outlined the end result of Greece attempting to hide sparse demand for its debt by forcing its banks to binge on it using excessive leverage. Of course, once you eat too much garbage, you start to stink, and eventually... Well, let's look at it from a visual perspective:

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 Greece and the ECB kicked the can down the road for two years, but as fate would have it... Reality rears its ugly head, as exemplified in today's MSM headline from CNBC: Record Losses at Greek Banks Show Pain of Bond Swap

Greece's top banks posted historic losses for 2011 on Friday, hit by a bond swap last month that blew holes in their balance sheets and nearly wiped out their capital base.

Together, National, Alpha, Eurobank and Piraeus, posted an aggregate loss of 28.2 billion euros ($37.3 billion), about 10 times their current market worth or 13 percent of the country's GDP .

The banks treated losses from last month's bond swap to cut the country's debts — part of a rescue package for Greece negotiated with the European Union and International Monetary Fund — as if they took place last year.

Inflicting real losses of about 74 percent on bondholders, Greece's debt swap proved a near fatal financial torpedo for lenders, crippling the sector's capital base.

From the big four banks, only Alpha spelled out clearly where this left its Core Tier 1 capital ratio. The other three reported where capital ratios would land after their use of standby funds provided by a capital backstop, the Hellenic financial Stability Fund (HFSF).

Alpha's core capital ratio (Tier 1) fell to 3 percent. Eurobank [EFG-FF  0.61    0.004 (+0.66%)   ], the country's second biggest, did not disclose the figure but said the hit left it with total equity of 875 million euros.

National Bank [NAG-FF  1.73    -0.02  (-1.14%)   ], the country's biggest lender with operations in Turkey, said its Core Tier 1 ratio would reach 6.3 percent, taking into account the use of a 6.9 billion euros standby facility provided by the HFSF fund.

Piraeus gave no Tier 1 figure but said tapping up to 5 billion euros of HFSF funds would boost its total capital adequacy ratio to 9.7 percent.

Greek bank shares have shed 74 percent in the last 12 months, underperforming the Greek stock market which is down 50 percent.

...Battered by a shrinking deposit base, rising loan impairments and unable to access wholesale funding markets, banks will need to fill the resulting capital shortfall and meet capital adequacy targets set by the central bank.

They face a core Tier 1 target of 9 percent by end-September.

... With the economy mired in recession...

I think its fair to say "depression' at this point. The destruction of the banking system is what pushed the US over the edge in the early 1900s, and it had a lot more going for it than Greece does.

... and unemployment at a record 21.8 percent, asset quality deteriorated, meaning banks' non-performing loans rose further — by 130 basis points to 12.9 percent of Alpha's loan book. Eurobank's bad debt provisions rose 4.7 percent last year.

Relevant BoomBustBlog research:

Greece Public Finances Projections

Banks exposed to Central and Eastern Europe

Greek Banking Fundamental Tear Sheet

Those who follow me know that I have warned of this ad nauseum, through a variety of venues and media, focusing particularly on the destructive damage the bank collapses will bring, again...

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This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

This situation will simply get worse, considerably worse. I demonstrated in the post The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. 

Unlike as portrayed in the media, Greece is not a standout profligate child, but simply a microcosm of what is to come to a good portion of Europe. Just scan today's headlines for evidence of such.... German Manufacturing Shrinks Fastest Since 2009

Of course it did. Germany is a net export nation whose trading partners are dancing between hard landings, serial recessions, and outright depression! Exactly how does one expect this song to be sung? Let me count the ways for you, as Germany is currently the undeserved linchpin to what's left of EU fiscal integrity. Reference The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

Google posted robust 1Q results topping the consensus estimates by a wide margin – revenues increased 24% to US$10.6 billion as against US$8.6 billion in the same period, a year earlier. This was significantly higher than the consensus estimate of US$8.2 billion for the period.Revenues were in line with our estimates – we expect full year revenues to total US$43.1 billion. Revenues from Google websites accounted for around 69% of total advertising revenues while that from the partner websites contributed to around 27% of revenues. The remaining 4% of revenues were accounted for by licensing and other fees. Geographically, the US generated around 46% of total revenues, UK accounted for 11% of total revenues while other markets accounted for the rest 43% of revenues.

Growth in revenues was driven by an increase in click volumes, especially in the US market. The number of clicks increased by a significant 39% year-on-year and 7% quarter-on-quarter during 1Q highlighting the increasing popularity of the search engine. However, on the flip side, the cost-per-click or the average cost paid by advertisers declined 12% year-on-year during the period – largely due to the growing business in the emerging markets and mobile space, which usually carry lower margins. Nonetheless, Google's strong position in the mobile space – including both smartphones and tablets – is enabling the company to generate robust revenue growth. The Company also continues to benefit from the success of its DoubleClick ad exchange as well as the overall improving quality of advertisements. Google also witnessed growth in the European and Asian markets. Japan registered strong performance largely on account of higher contribution from SMB segment.

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Total costs increased 16% year-on-year to US$3.8 billion as against US$2.9 billion in the same period, a year earlier. This was largely due to the fact that the Company made investments in new products, increased its advertising expenses as well as increased wages. Further, higher amortization charges, the data center operations cost as well as content acquisition costs drove the overall cost of sales higher. As a result, higher costs had a negative impact on gross margins which contracted by 136 basis points to 64.4% as against 65.8% in the year earlier quarter.

Operating expenses increased 16% year-on-year to US$7.3 billion as against US$6.3 billion in the same period, a year earlier. A 25% jump in selling and marketing expenses was largely responsible for the spike in operating expenses. The R&D expenses in fact declined as a percentage of sales during 1Q. Higher operating expenses had an adverse affect on margins which contracted 77 basis points to 31.8% during 1Q.

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From the profitability perspective, Google outshone nearly all its competitors as earnings increased by a significant 61% to US$2.9 billion (or US$8.75 per share) as against US$1.8 billion (or US$5.51 per share). Further, the Company continues to have a strong balance sheet with cash balances at an enormous US$49.3 billion at the end of 1Q.

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