Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
In their first full week of 2013, stocks managed -- barely -- to put up a positive return, as the S&P 500 rose 0.06%. The narrower Dow Jones Industrial Average (^DJI +0.73%) fell 0.2%. Two large-cap technology stocks, Micron (MU +10.95%) and Facebook (FB 0.89%), were among the standout performers, while another tech darling, Netflix (NFLX 3.41%), brought up the rear.
In fact, video streaming service Netflix was the third-worst performing stock in the S&P 500 last week, losing 8.5% (Netflix was the best-performing stock in the index in 2013.) Much of that decline was prompted by a downgrade to Underweight (analyst-speak for Sell) by Morgan Stanley on Tuesday. The broker is concerned that heightened competition from Amazon Prime Instant Video, HBO Go, and Hulu Plus will have slower subscriber growth and increased content costs weighing on Netflix's earnings power.
The magnitude of this week's drop is a reminder that Netflix shares, which are outrageously expensive on any traditional valuation metric, are vulnerable to this type of volatility. As an old-school value type, I'd be the last one to suggest that valuation doesn't matter; however, traditional metrics simply don't convey much information in these situations. Furthermore, when it comes to a secular growth story, a long holding period will mitigate the impact of overvalution. I'm not advising anyone to go "all in" on Netflix right now, but neither should long-term shareholders flee the stock, either, in my opinion.
For a positive, business-focused story on Netflix from this week, find How Netflix won CES. On to two of the big winners of the week:
Micron Technology were the third-best performing stock in the S&P 500 this week, gaining 13.1%, on the back of a blowout fiscal first quarter earnings announcement, which saw earnings and revenues grow 165% and 120%, respectively! Brian Pacampara has the meat on Micron's first-quarter results, while I recommend my colleague Anders Bylund's 2014 outlook for Micron.
Facebook's stock got a boost on Monday as two brokers, Morgan Stanley and SunTrust Robinson Humphrey raised their price targets for the stock (while reiterating their "buy" recommendations); the shares rose 6.2% this week. SunTrust's analyst, Bob Peck, cited five factors behind his bullish outlook:
(1) Ad load concerns seem to be overdone and are being offset by better targeting & pricing;
(2) Teen usage concerns are [overblown], as Facebook has crossed the chasm from "cool app" to a utility;
(3) Social apps, and Facebook particularly, seemed to have a strong 4Q based on 3rd party reports;
(4) The monetization of Instagram has begun, helping counter a tough comp;
(5) Mobile video ads have begun, also helping a tough comp. We think Instagram and video ads can add ~$300m in new revenues in 2014.
While several of these are short-term issues, the last of these -- mobile video ads -- represents, in my opinion, a genuine upside "wild card" that could create significant long-term value. While Peck estimates the associated new revenue at $300 million in 2014, last month, Brian Nowak of Susquehanna Investment Group told CNBC that video advertising could add $1.1 billion to Facebook's revenue this year.
For context, the market leader in this area, YouTube (owned by Google), pulled in an estimated $5.6 billion in advertising revenue in 2013, for 50% year-on-year growth (net revenues -- those YouTube keeps after paying "partners" that create video content -- were $2.0 billion). YouTube now represents a fifth of aggregate ad spend on U.S. online videos. Can Facebook achieve a fifth of that this year? (One-fifth of $5.6 billion get us to Mr. Nowak's $1.1 billion estimate.) I don't know, but it doesn't seem that far-fetched given the size of its platform.
