What do we want out of a company? What defines a good stock that can power higher regardless of the averages, including a day like today?
I could tell you we want companies that report numbers -- both top line, the sales, or bottom line, the profits -- that are better than what the consensus of Wall Street analysts who follow the stock were looking for. I could say we are hunting for companies that have such dominance that they have growing profit margins. I could tell you we are always on the lookout for managements with a vision, that are always trying to assess where the hockey puck is going, not where it's been (thank you Wayne Gretzky).
Or I can just say we want Facebook (FB), because it has all of that and so much more. Last night, Facebook, a holding in Action Alerts PLUS, reported the single best quarter of this now endless earnings season. Revenues of $5.4 billion, up a staggering 52% year over year, came in roughly $150 million above the consensus -- a startling amount. Earnings per share of $0.77 compared with last year's $0.42, crushed the consensus of $0.62. Advertising revenue jumped 57%, year over year, to $5.2 billion, with 82% of that total ad revenue on mobile.
That's the kind of stuff that can make analysts raise estimates gigantically so a company's stock, which looked expensive vs. its future earnings yesterday, can now seem much cheaper today given the trajectory in place. Remember, the closest correlation we can find, short of a takeover, of how a stock advances is the size of the beat, how much estimates get taken up, which immediately justifies paying a higher price for the stock.
But the numbers seem downright antiseptic vs. what's really going on at Facebook. In just a few short years this company's changed our lives in a way few companies ever have. There are 1.09 billion daily active users on Facebook and they are spending about an hour a day on their page or on Messenger or on Instagram. That's right, a billion people are finding an hour each day to be on a network that didn't exist all that long ago and that they program themselves except for the ads that Facebook pushes from more than three million active advertisers. That's how it can grow its gross margins. It gets to put in more ads because you put in more content. It's done this mostly on your handheld, which is the secret because that's always with you.
As the quite simply brilliant Sheryl Sandberg, the company's chief financial officer, said on the incredibly gifted conference call, "Consumers have shifted to mobile and businesses know they need to catch up." She continues, "We hear from marketers that figuring out mobile today is like figuring out TV in its early days, but given where consumers spend their time the question now is not if they should market on mobile but how."
Think of what Facebook has done here. It pivoted from a desktop dinosaur to a mobile monster in no time flat and then was able to take advantage of all of the things that, say, an Apple (AAPL) has done for cellphones to make it a better experience for the viewers and the advertisers than their TVs. We don't lug TVs around but we are naked without our phones and our phones have screens that are better than most of our TVs. CEO and founder Mark Zuckerberg describes this model as foundry lite, but that's just a fancy way of saying that it creates a platform and you design the content for it and advertisers get to ply their wares to those who actually match their needs and then the customers buy them right then and there.
Sandberg then gives a perfect example of how Facebook makes its money, the reason why we are willing to pay more for its stock: canvas ads. These kinds of ads, she says, "showcase products by combining video images and call to action buttons." How does it work? She gives the example of how Lowe's (LOW) motivated millennials to take on do-it-yourself projects. The fabulous hardware company then, she says, "targeted 25 to 34 year old homeowners with Canvas Ads that let them see bathroom designs, discover the products in each design and tap to purchase." How great was it for Lowe's? "The ads, she says, "were so engaging that people spent an average of 28 seconds interacting with them and Lowe's saw a 6.7 times return on ad spend."
There it is. What Facebook really is: The optimal method for an advertiser to reach the hard to reach and then get a gigantic return as the demographic they most want to reach is not only found but then purchases in the same place as they watched the video, their phone.
I had to try hard to wrap my head around how amazing this all is. Think of it like this. Facebook is a high-definition television that puts on commercials you are actually interested in, as opposed to being wasted on others and you watch the full commercial rapt, which almost never happens on television, and then you buy what you see. You give Facebook a dollar, you design the right ad with them and you get six point seven dollars in return while you are locking up the demographic that most matters to your future for perhaps the rest of their lives. No wonder advertising revenue is growing at 64% in North America and 62% in Asia Pacific and 49% in Europe. The payoff for the advertiser is magnificent and the cost to produce the additional programming that Facebook needs to attract the viewers who are interested in what the advertisers have to say is practically nil.
Plus, no one else can do this. Not Alphabet (GOOGL). Not Yahoo! (YHOO). Not any television network or entertainment company. Only Amazon (AMZN) can possibly compete because it is in synch with what you have bought, but the programming isn't anything you want to watch for an hour. It's just a big commercial. (Apple and Alphabet are also holdings in Action Alerts PLUS.)
In other words, the Facebook "stock story" is about as unassailable as you can get.
Now I am not saying that Facebook is the only company out there that has this profile. We see it all of the time with drug companies that come up with something that no one else has that it can make a fortune off of without any choice to you, the patient. We know that there are plenty of consumer product companies with such unapproachable brands like a Johnson & Johnson (JNJ) or a Colgate-Palmolive (CL) might have. But those can be breached by a better mousetrap and are subject to discounting, price wars and displacement. Heck, we know that the greatest product creator and manufacturer of our time can stall out, and its stock get sold by a man who was instrumental in getting the buyback to end all buybacks, Carl Icahn. Great job Scott Wapner on that "get."
But Facebook? Nothing's impervious. Nevertheless, this is about as impermeable a story imaginable. Hence the real reason why, in a day that the stock market took a tumble for dozens of reasons, it just didn't matter.