MONEY stocks

The Force Is With Electronic Arts

Star Wars: Battlefront ships November 17, 2015.

Strong preorders for Star Wars: Battlefront have led the game company to forecast record revenue this year.

Electronic Arts is back from the “dark side”.

The video game publisher, voted the “worst company in America” on the website in 2012 and 2013, is forecasting record revenue this year thanks to the anticipated success of a new Star Wars-themed game launching in November.

EA said on Thursday that “extremely strong” preorders for “Star Wars: Battlefront” were behind its decision to raise its full-year revenue forecast to $4.45 billion from $4.40 billion.

It was the first time in 15 years that the Redwood City, California-based company had raised its revenue forecast in the first quarter, Jefferies analysts said in a client note.

EA’s shares fell on what appeared to be an underwhelming forecast, but analysts said the company was likely being cagey.

“(EA) is merely trying to rein in runaway expectations for Star Wars, during a highly competitive holiday window for first-person shooters,” Barclays analyst Chris Merwin, who raised his price target on EA by $14 to $82, wrote in a research report.

And expectations are high.

2D Boxshot Wizard v1.1

“They’ve done an incredible job with the game,” said Ben Howard, an executive at video game review site GameSpot, who played the game at the E3 gaming industry trade fair in June.

There have been plenty of other Star Wars games over the years, Howard noted.

“(But) I’ve never played a game which felt so much like playing a movie of Star Wars … they’ve got it exactly right.”

A trailer released in April for the game, a reboot of the 10-year old “Star Wars: Battlefront” game published by LucasArts, has already garnered more than 19 million views on YouTube.

The positive reception marks a turnaround for EA, which a few years ago was struggling to grow after many gamers switched to free games on social networks and mobile devices.

Gamers also became disillusioned with what they considered to be the inferior quality of some games, as well as high prices and server glitches that marred their experience.

John Riccitiello quit as chief executive in 2013 after six years at the helm after the company missed several targets.

“I’d rather see them be conservative and beat expectations than suffer through what they did several years back,” said Eric Handler, an analyst at MKM Partners.

The new game will launch a month ahead of the release of Walt Disney’s “Star Wars: The Force Awakens”, the latest movie in the iconic franchise.

EA’s shares have nearly tripled in value since current CEO Andrew Wilson, who has been focusing on expanding EA’s high-margin digital business, took over in September 2013.

The digital business, which involves distributing games through the Internet as opposed to sales of game discs, has driven growth for the past few quarters.

At least four brokerages raised their price targets on EA’s shares on Friday. Even so, EA shares were down 0.6% at $71.87 in afternoon trading.

Of 22 brokerages covering EA, 15 have a “buy” or a higher rating on the stock while seven have a “hold”.

The median price target is $79.50. Up to Thursday’s close, EA shares had risen about 53% this year.

TIME Earnings

Here’s Why LinkedIn Shares Are Tanking Today

LinkedIn Corp. To File For IPO
Justin Sullivan—Getty Images In this photo illustration, the LinkedIn logo is displayed on the screen of a laptop computer on January 27, 2011 in San Anselmo, California.

LinkedIn may need to do some better networking with Wall Street

LinkedIn announced Thursday that its sales and earnings in the second quarter had beaten analysts expectations. How did investors react? They sold big-time.

Shares of LinkedIn fell $21, or just over 10%, on Friday to just over $205. That’s the company’s biggest one day stock dive since the end of April, when the shares fell nearly $50 in one day.

What happened? Like many résumé writers, LinkedIn seems to have taken some liberties to make its earnings seem more impressive than they actually were.

First of all, the company’s earnings beat was manufactured — LinkedIn told analysts to lower their expectations at the end of April, so when the earnings came out, they were actually better than the most recent expectations, but lower than what people thought the company would earn a few months ago.

Second, the company said by its metrics it earned $71 million in the second three months of the year. In fact, LinkedIn didn’t actually turn a profit in the second quarter. By generally accepted accounting principals, it lost $68 million. (Companies are allowed to report results using their own adjusted accounting as long as they report GAAP results as well, which is what LinkedIn did.) Still, that loss was less than analysts were expecting.

Third, LinkedIn upped what it may earn in the next year. But a good portion of that profit increase is coming from, an online learning platform that LinkedIn bought earlier this year, and not an improvement in LinkedIn’s core business. And Lynda will be adding more profits than expected not because that business is doing better, but because LinkedIn is completing the acquisition sooner. Take out earnings from Lynda, and projections for LinkedIn’s core business appears to be dropping.

But the biggest problem for the company is the rates it can charge for display ads is dropping. Linkedin said revenue from display ads was down 30% in the quarter. Most of the revenue boost that LinkedIn has gotten recently has come from selling premium services to recruiters and others. But many analysts think that market is basically tapped out for LinkedIn. So that avenue for growth might be over, or at least slowing.

Like many people on its website, LinkedIn seems to be in need of a transition, but it’s still just making connections.

TIME chinese stock market

China’s Stock Market Just Had Its Worst Monthly Drop In 6 Years

FUYANG, CHINA - JUNE 26:(CHINA OUT) An investor observes stock market at a stock exchange hall on June 26, 2015 in Fuyang, Anhui province of China. Chinese stocks dropped sharply on Friday. The benchmark Shanghai Composite Index lost 334.91 points, or 7.40 percent, to close at 4192.87 points. The Shenzhen Component Index shed 1293.66 points, or 8.24 percent, to 14398.78 points. (Photo by ChinaFotoPress)***_***

The country's economic woes continue

China’s stock market fell again on Friday, with The Shanghai Composite Index slipping 1.1% to close at 3,663.73, according to a report in Bloomberg News.

The loss brings to an end the worst month for stocks in China since August of 2009, when China was still reeling from a global financial panic and recession that caused massive losses in financial markets around the world.

For the month of July, the Shanghai Composite Index fell a total of 15%, despite unprecedented state intervention aimed at calming markets. According to Bloomberg, the losses on Friday started “after Reuters reported that Chinese regulators had asked financial institutions in Singapore and Hong Kong for stock-trading records as part of efforts to track down investors betting against shares in China.”

Chinese regulators also halted trading in 505 companies on the Shanghai and Shenzhen exchanges on Friday, equivalent to 18% of all listings.

MONEY tech stocks

3 Ways Facebook is Crushing Twitter

Alamy—© dolphfyn / Alamy

What Facebook has that Twitter wants: 1 billion more users and an advertising strategy.

Two companies are invariably mentioned in the same breath whenever the term “social media” gets thrown around: Facebook FACEBOOK INC. FB -1.25% and Twitter TWITTER INC. TWTR -1.59% .

But while both Silicon Valley giants create networks that allow you to engage with friends and celebrities, the two have less in common than you might think. That was plainly evident in both companies’ recent earnings reports.

While Facebook — which is now worth more than 10 times as much as Twitter — is still considered a story of rapid growth, Twitter is quickly losing its luster on Wall Street as it struggles to match its rival when it comes to user growth and ad revenue.

Here’s what their financial results revealed:

The Ad Gap

Facebook announced it had taken in about $3.8 billion in advertising revenue in the second quarter, up from $2.7 billion a year before — a 41% jump. And advertisers are lining up across the globe to reach Facebook users, as international ad revenue climbed to $2 billion.

Read next: What Twitter Needs to Do Next to Satisfy Investors

Yet there are still many more ways Facebook can leverage it’s popularity into future growth. For instance, Facebook’s popular photo-sharing app Instagram, with about 300 million users, and its instant communication tools Messenger (700 million users) and WhatsApp (800 million) have the potential to add meaningfully to revenue in the future.

Twitter reported some good news on the sales front too. The microblogging site surprised analysts this week with stronger-than-expected revenue growth, as ad sales jumped to $452 million from $277 million over the same period 12 months ago. This was certainly welcome news for investors who had endured a 25% drop in the company’s stock price in the first three months of this year amid disappointing revenue growth.

Still, Facebook generates twice as much sales in a quarter than Twitter does annually.

The User Gap

Facebook just has a staggering number of active monthly users. To put it in perspective, there are about 7.3 billion people in the world and about 1.5 billion of them — 21% — are on Facebook. There are roughly 213 million active users of Facebook in the U.S. and Canada out of more than 355 million people. American and Canadian users are particularly beneficial to Facebook’s bottom line, which takes in $8.63 in advertising revenue per user there compared to $2.61 worldwide.

This growth in popularity is crystallized when you look at mobile phone carriers. Those who only access Facebook through their handheld device jumped from 399 million a year ago, to 655 million now. Overall, 1.3 billion people access Facebook in the palm of their hands.

While Twitter impressed the street with its revenue numbers, the stock dropped double digits thanks to the company’s inability to significantly grow its user base. Chief financial officer Anthony Noto said in a conference call after the earnings release that it would be “a considerable time” before such growth occurred.

Twitter has 66 million monthly active users in the U.S., up from 60 million a year ago, and 250 million internationally. In other words, it is more than 1 billion users shy of playing in Facebook’s league.

The Valuation Gap

While Twitter theoretically has more room to grow than Facebook, investors have to pay a stiff premium when betting on Twitter’s future. The stock’s price/earnings ratio, based on projected profits, is 64, according to Morningstar. That makes Twitter shares considerably more expensive than Facebook’s, with a P/E of 37.

To add insult to injury, Twitter announced that it was cutting the range of what it expected to spend on capital investments this year from $500 million to $650 million to $450 million to $550 million. Facebook meanwhile spent $549 million in capital investment in the second quarter alone.

MONEY strategy

Why Focus Is Essential to Building Wealth

Jorg Greuel—Getty Images

Persistence is the key to any successful endeavor.

Building wealth is a process, not an event — a process that takes discipline and a long-term outlook. You must focus on yourself, not what others are doing. Work hard and maintain a consistent approach. This may not be easy, but it’s doable for most people if they choose to make a commitment and stick to it.

In the end, though, the “stick to it” part is what usually trips people up.

In an excellent post on his blog Seeking Wisdom, Jana Vembunarayanan gives a fantastic summary of how to succeed at just about anything. Here are his observations and recommendations, to which I’ve added some suggestions for applying them to your finances.

1. Recognize that it takes a long time to create anything valuable. Investing works over long periods of time. The market has never lost money over any 20-year stretch. The problem for many people is that they don’t understand their time frame. They confuse short- and long-term money and end up bailing at the worst possible moment. Finding a strategy that works, and sticking with it for decades despite the inevitable booms and busts of the markets, is not exciting. While you might feel you are missing out on the latest big thing, you will most likely have the last laugh.

Read next: 4 Personality Quirks That Sabotage Your Savings

2. Work hard every day even if you don’t see improvement in the short term. Building your skills enables you to earn a higher income, so you can save more. Small increases in savings each year are barely observable at first, but over time you can be working toward saving 20% of a $100,000 salary, which will provide great rewards in the future. Many will give up because they become impatient with a seeming lack of progress. Accept the short-term stagnation knowing you will be rewarded with the miracle of compounded returns in the future.

3. Keep doing it consistently for a very long time without giving up. Persistence is the key to any successful endeavor. While it might satisfy a short-term urge to remodel your kitchen by raiding your 401(k) account, resist this temptation and stick to the plan. Investing is simple but not easy. Track your wealth accumulation yearly, not daily. This encourages you to build your future, not mortgage it.

4. Enjoy the process, and don’t worry about the outcome. Put things on autopilot. Set your plan to save a certain percentage of your salary, with an increase of a percentage point or two each year until you maximize your contributions. Find a few diversified, low-cost index funds, add an automatic yearly rebalance, and forget about it. Enjoy your life and ignore the daily end-of-the-world events that saturate the financial media in their quest for advertising dollars. Focus on the fact that you will be financially secure by sticking to your plan. In your free time, devote your energies to finding things you like to do. Find ways to increase your skill level and eventually make money from a “job” that doesn’t seem like work. This way to supplement your income might lead you down some surprising paths while you have the security of your savings plan at your day job.

5. Don’t compare yourself to others; instead, compare yourself now to yourself two years ago. Keeping up with Joneses is, as serial insulter Donald Trump would say, a loser’s strategy. A phenomenon called “lifestyle creep” can sabotage the best-laid plans. It means that the more you make, the more you spend. Your only accomplishment is making the hamster wheel spin faster. Don’t worry about what others have. No matter how rich you are, there will always be someone who has more than you. And such people might just be renters anyway, buying their goodies with credit cards with huge balances. Look at yourself instead. Build a disciplined savings plan, and follow it with no deviations. Competing with your neighbors over who has the most “stuff” is not a good use of your time.

As Warren Buffett once said, “Games are won by players who focus on the playing field, not by those whose eyes are glued to the scoreboard.” Keep these five points in mind, and your probability of success will increase immensely. Good habits will eventually lead to superior results in whatever you do. The key is to figure out what works for you and stick to it. Your process will determine your future. Spend time developing it, and then enjoy your life.

Read next: 19 Secrets Your Millionaire Neighbor Won’t Tell You

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MONEY stocks

5 Things Amazon Wants Investors to Know About Its Earnings Illustrations Ahead Of Earnings Figures
Bloomberg via Getty Images

Prime Day was a huge success, according to Amazon CFO Brian Olsavsky. AMAZON.COM INC. AMZN -0.11% reported blowout second-quarter results last Thursday, along with strong guidance for Q3. While the company’s profit margin remains thin, most analysts had been expecting Amazon to lose money in Q2 and then lose even more money in Q3.

After the earnings report came out, new CFO Brian Olsavsky spent some time talking to analysts about the company’s results and outlook. Here are five important tidbits from his remarks.

First signs of cost leverage

So, we are getting very good top-line growth. A lot of that is fueled by Prime, Prime adoption. And we are dropping a lot of it to the bottom line with … efficiency projects.
— CFO Brian Olsavsky

For a long time, the investment thesis for Amazon bulls has been that as the company’s revenue rises, it will be able to leverage fixed expenses to drive significant margin expansion. As a result, these investors haven’t been worried about Amazon’s razor-thin profits.

But even as Amazon’s revenue surged more than tenfold from 2004 to 2014, its profit margin actually shrank quite a bit. With the company approaching $100 billion in annual revenue, it was reasonable to wonder when Amazon’s profitability would start to rise again. Last quarter was a nice proof point in this regard, as Amazon’s top-line growth helped drive strong earnings growth.

But still investing heavily

Yes, headcount was up 38% year over year. The vast majority of that is in operations where we’re adding people for our new FCs and call centers.
— Brian Olsavsky

On the other hand, investors shouldn’t conclude that Amazon is backing off on its investments for future growth. In fact, Amazon’s headcount is actually growing even faster than revenue, at 38% year over year. In Q2 alone, Amazon added more than 18,000 employees.

As Amazon continues to grow, add more warehouses, and sign up more Marketplace sellers for Fulfillment by Amazon, it needs to continually increase its shipping capacity. Amazon wants to make sure it can support the expected growth in demand. Meanwhile, it also needs to keep up on the customer service side in order to maintain its legendary customer satisfaction ratings.

Prime Day was a big success

[W]e’re thrilled with the results of Prime Day, surpassed all of our expectations. Any metric we looked at, we think it was a huge success. Customers saved millions. New Prime members signed up in higher rates than we’ve ever seen. People bought more devices than on any other day.
— Brian Olsavsky

There’s been a lot of controversy about Amazon’s recent “Prime Day” sale and whether it was a success. Wal-Mart attempted to disrupt the sale by offering its own huge online sale while chiding Amazon for requiring customers to be Prime members (at a cost of $99/year) to access the sale. Meanwhile, many Amazon shoppers complained the deals weren’t very good.

But Amazon’s management has called the sale a huge success. It did so in a press release during the event itself and in another press release issued the following day.

Olsavsky pointed to one of the biggest successes of the Prime Day sale: encouraging more people to sign up for the program. Since Prime subscribers are by far Amazon’s best customers, any event that drives a big jump in signups is a win for Amazon.

Amazon Web Services growth accelerates

[AWS] growth of 81% was up from 49% in Q1. You remember that we’re lapping a number of large price decreases in Q2 of last year, so it was somewhat expected.
— Brian Olsavsky

Another area where Amazon blew past investors’ expectations was in its Amazon Web Services cloud computing unit. Analysts had been very pleased last quarter when Amazon broke out AWS profitability for the first time, showing a segment margin of 16.9%. Yet Amazon managed to blow that number away in Q2 with a segment margin of 21.4%.

Olsavsky talked about how AWS is becoming ever more efficient on a cost basis. And Amazon lapped some big price cuts from 2014 last quarter, which led to a sharp acceleration in year-over-year growth in addition to the segment’s margin improvement.

Price wars might be less necessary now

While pricing is certainly a factor, we don’t believe it’s always the primary factor. In fact, what we hear from our customers is that the ability to move faster and more agile is what they value.
— Brian Olsavsky

While the AWS segment margin is soaring now, it was in the single digits just a year ago thanks to a big round of price cuts as Amazon and its tech peers angled for bigger pieces of the cloud-computing pie. Some investors may be wondering whether another profit-sapping price war could occur in the future.

Obviously, it’s impossible to be sure. But Olsavsky did have some good news on this front, too. He stated that pricing is less important to AWS customers than things like speed, agility, and innovation. The more that AWS can move toward offering unique value-added solutions rather than providing commodity services, the more secure its long-term profitability will be.

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MONEY stocks

The 4 Most Surprising Stocks of 2015 (So Far)

Traders on the floor of the New York Stock Exchange
Spencer Platt—Getty Images Traders on the floor of the New York Stock Exchange

These high-flying stocks have soared in an otherwise sleepy start to the year.

The stock market is having a quiet year in 2015. The famed S&P 500 index is up a meager 2.3% since the New Year, and the Dow Jones Industrials index has lost 0.4%.

But there are always exceptions to the rule. We asked a panel of Motley Fool contributors to outline the four biggest surprises they’ve seen in 2015, and this is what they came up with.

Here, you’ll find a few long-running turnaround stories such as video-game designer Electronic Arts ELECTRONIC ARTS INC. EA -1.04% and casino operator Isle of Capri Casinos ISLE OF CAPRI CASINOS, INC. ISLE 0.16% . Digital entertainment veteran Netflix NETFLIX INC. NFLX 2.59% , meanwhile, is going from strength to strength, and former bargain-bin shoe designer Skechers USA SKECHERS USA SKX 0.98% has become a powerhouse footwear brand in its own right.

These stocks have gained between 54% and 125% so far this year — and that includes retreats from much loftier yearly highs in some cases. Dig into these juicy stock stories right here:

Brian Stoffel (Netflix): Let’s consider where Netflix stood when it entered 2015. Although the company’s stock had fallen 25% in the last three months of 2014, it still traded for a hefty valuation.

Shares were valued at 90 times trailing earnings, and Netflix hadn’t produced positive free cash flow during the year. The company had just announced ambitious plans to expand to nearly every country on the map, and warned that it would take a while before its investments truly paid off.

Since then, the stock has more than doubled — up an amazing 125% in just seven months’ time. While it’s still a mighty expensive holding — now over 300 times trailing earnings — the company’s success at growing its subscriber base truly stands out.

Total global streaming subscriptions rose a whopping 30% to 65.5 million from the second quarter of 2014 to the same time frame this year. The biggest gains came outside the U.S. One year ago, there were 13.8 million international subscribers to Netflix services. That number has jumped almost 70% since then to 23.25 million. That kind of growth shows just how popular Netflix is with an international audience, and why the stock has done so well over such a short time frame.

Rich Duprey (Isle of Capri Casinos): For a casino operator that once seemed to be on its deathbed as the island gambling oasis of Macau off mainland China attracted betting and investment dollars, Isle of Capri Casinos has to be one of the most surprising turnaround stories — not only of this year, but of the past few years.

The casino operator’s recovery began last year, but has accelerated in earnest in 2015, with shares more than doubling since the start of the year.

Isle of Capri Casinos owns or operates 15 casinos in seven states, and strong performance has fueled its drive higher, with revenue and earnings topping analyst expectations. A continuously improving economy and more disposable cash in consumers’ pockets have been big factors in helping the casino operator outpace even its thriving industry.

Unlike other bigger, more well-known players, Isle of Capri Casinos doesn’t have exposure to Macau. Thus, when revenue there started to plummet last year after a crackdown on corruption, the U.S.-based operator, whose properties are mostly in secondary markets, was unfazed. This has helped its stock perform far better than its gaming peers.

There also doesn’t appear to be any danger of the casino rolling snake eyes anytime soon, which makes Isle of Capri Casinos my most surprising stock of 2015.

Dan Caplinger (Electronic Arts): It wasn’t so long ago that many had declared the era of traditional video games dead, with the potential competition from mobile devices and other newer options threatening the viability of console-based video gaming. Yet Electronic Arts has defied calls for its early demise, with the stock vaulting higher by 57% so far in 2015 after roughly doubling in 2014.

Electronic Arts’ renaissance came largely thanks to new hardware from the major game-console makers, which gave EA a chance to showcase its game-making capabilities. With core franchises including Battlefield, Dragon Age, and sports must-haves like the Madden series of football video games, Electronic Arts has attracted gamers of all ages.

At the same time, EA has addressed some of the quality concerns that its customers had, with new games like Titanfall getting critical acclaim. EA’s subscription service has also had early success. It offers gamers a chance to try older titles that they otherwise wouldn’t buy, but at a price they’re willing to pay, generating recurring revenue for the company.

Given how far it climbed in 2014, EA didn’t have many investors thinking 2015 would be equally impressive. For now, though, Electronic Arts is executing flawlessly, and that bodes well for its future prospects.

Tamara Walsh (Skechers): In the past, when you wanted to buy a pair of knock-off sneakers, Skechers was your one-stop shop. Today, however, the retailer has evolved from a cheap purveyor of off-brand footwear into the number two brand share position in the U.S. athletic footwear market. As if that isn’t surprising enough, the stock has gained an eye-popping 124% so far in 2015. Shares are now trading at an all-time high around $124 per share.

Skechers shocked Wall Street earlier this year after delivering blowout first-quarter results in which sales climbed a record 40% to $768 million. Earnings for the period also topped expectations, coming in at $1.10 per share. The strong fiscal 2015 first-quarter results came on the heels of an annual sales record of $2.4 billion in 2014.

It seems Skechers has a winning formula. The company isn’t shy about using celebrity endorsements to move its products, including deals with world famous drummer Ringo Starr, recording artist Demi Lovato, and legendary quarterbacks Joe Montana and Joe Namath, to name a few. With the stock now trading near an all-time high, investors may want to remain on the sidelines for now. Nonetheless, it will be interesting to see if Skechers continues to surprise us in the quarters ahead.

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MONEY stocks

What Twitter Needs to Do Next to Satisfy Investors

Person holding cell iphone with twitter app
Michael Melia—Alamy

The company's stock price sank 13% in the first half hour of trading on Wednesday.

Twitter TWITTER INC. TWTR -1.59% interim CEO Jack Dorsey’s criticism of the company’s efforts to woo new users may just be the first step to address its long-standing problems.

But being frank is not enough.

To generate long-term earnings growth and satisfy investors, Twitter needs to broaden its portfolio and create an ecosystem of products similar to that of Google GOOGLE INC. GOOGL -1.06% and Facebook FACEBOOK INC. FB -1.25% .

Wall Street analysts took a dim view of the management’s commentary on a post-earnings call on Tuesday. At least 15 brokerages cut their price target on Twitter to as low as $30 – 18% lower than Tuesday’s close of 36.54.

Investors were harsher. Twitter’s shares fell 12% to $32.15 in premarket trading, set to erase nearly $3 billion of the company’s market value.

Dorsey warned on Tuesday that the company is unlikely to see sustained meaningful growth in monthly active users (MAU) until it can reach the mass market, after it reported its the slowest growth in MAU since it went public in 2013.

RBC analyst Mark Mahaney said improvements in monetization would not be enough to sustain high growth rates.

“That’s why MAU growth matters. That’s why user and usage metrics matter. And that’s why hitting metrics growth walls really matters.”

Dorsey said the company would focus on more disciplined product execution, simplify the website and better communicate Twitter’s purpose.

Edison Investment Research analyst Richard Windsor disagreed. “I think that these areas are simply dancing around the edge of the real problem.”

“In essence it must go from being a one product company to an ecosystem and this will require a radical shift in strategy from where the company is today,” Windsor said.

Twitter, which is in the midst of a management change after Chief Executive Dick Costolo stepped down in June, said core MAUs rose only 2 million in the second quarter to 304 million.

That number pales in comparison to social-media rival Facebook’s FB.O 0% 1.4 billion users.

MONEY stocks

Investors Are Bullish on Facebook Ahead of Earnings Report

Mark Zuckerberg, chief executive officer of Facebook Inc., speaks during the Facebook F8 Developers Conference in San Francisco, California, U.S., on Wednesday, March 25, 2015. Zuckerberg plans to unveil tools that let application makers reach the social network’s audience while helping the company boost revenue. Photographer: David Paul Morris/Bloomberg  *** Local Caption *** Mark Zuckerberg
David Paul Morris—© 2015 Bloomberg Finance LP Mark Zuckerberg, chief executive officer of Facebook Inc., speaks during the Facebook F8 Developers Conference in San Francisco, California, U.S., on Wednesday, March 25, 2015.

Shares in the social media company, which reports its earnings on July 29, are up 20% for 2015.

Investors in social media shares have zeroed-in on Facebook FACEBOOK INC. FB -1.25% piling into stock options to add bullish bets on the company in the days ahead of its Wednesday earnings.

Facebook escaped a rout in social media stocks after last quarter’s results and its shares are up about 20% this year. The stock and a handful of other winners account for the bulk of the S&P 500’s SPX 0% gains this year.

The ascent has made Facebook one of the ten largest S&P companies in terms of market capitalization, with the stock now worth more than $260 billion – surpassing decades-old companies like Wal-Mart WAL-MART STORES INC. WMT -0.25% and Procter & Gamble PROCTER & GAMBLE COMPANY PG -0.89% .

Traders in the options market are betting on more gains for the stock after it reports results Wednesday.

“Facebook is definitely the standout leader in the group,” said Adam Sarhan, chief executive of Sarhan Capital.

“The stock’s recent performance, combined with the company’s leading position, explains the bullishness of the options activity,” he said.

Earnings seasons are typically choppy for stocks and even more so for social media companies, due to their high valuations and ongoing concern, in some cases, about their business models.

Last quarter, investors spooked by disappointing results sent shares of Twitter TWITTER INC. TWTR -1.59% , LinkedIn LINKEDIN CORP. LNKD -10.52% and Yelp YELP INC YELP 1.42% down by more than 20% the week they reported results.

“These stocks are some of the most expensive stocks in the market,” said Stephen Massocca, managing director with Wedbush Equity Management in San Francisco.

“If numbers are disappointing and either growth or profitability looks out of reach, it’s very easy to see why investors would get out in a hurry,” he said.

The bullishness in Facebook’s recent options trading makes it unique in the sector. The number of open contracts in Facebook’s options has jumped 25% since the start of July, and is the highest since mid-January.

Analysts expect robust mobile pricing and strength in video ads to help the company post strong results when it reports after the close of trading on Wednesday. Strong YouTube viewership helped drive Google Inc’s GOOGLE INC. GOOGL -1.06% second-quarter results, boding well for video on Facebook’s own platform.

In July, open interest in Facebook’s call options, usually used for bets the stock will rise, increased by 24%, twice as much as the increase in puts, which are usually bets on a decline. For every put option, there are now nearly two calls open, the lowest this ratio has been in favor of puts, according to options analytics firm Trade Alert.

“The recent decline in Facebook’s put/call open interest ratio to an all-time low implies long positioning ahead of earnings,” said Jim Strugger, a derivatives strategist at MKM Partners.

In contrast, trading in the options of Twitter, LinkedIn and Yelp suggest high risk of volatile moves in the shares but give little clue to their direction.

Twitter and Yelp are expected to report results on Tuesday afternoon, and LinkedIn’s results are scheduled for Thursday.

So far, there is little to suggest traders are preparing for the kind of selloff that social media shares experienced last quarter, said Anshul Agarwal, equity derivative strategist at Bay Crest Partners in New York.

“For LinkedIn, Yelp, and Twitter, we haven’t witnessed particularly bearish options flow,” he said.

MONEY stocks

Making Sense of Bank Stock Valuations

JPMorgan Chase & Co. And Wells Fargo & Co. Bank Branches Ahead Of Earnings
Bloomberg via Getty Images A man uses an ATM outside of a Wells Fargo & Co. bank branch in Los Angeles, California, U.S., on Tuesday, July 7, 2015.

"The techniques used for valuing bank stocks tend to be a moving target," explains bank analyst Richard Bove.

What causes bank stocks like Wells Fargo WELLS FARGO & COMPANY WFC -0.48% to trade for significantly higher valuations than bank stocks like Bank of America BANK OF AMERICA CORP. BAC -1.27% ?

The easy answer is that because Wells Fargo has a long history of shrewder management and higher profitability than Bank of America, it seems reasonable to expect the former to earn more money than the latter, and to thus produce a higher shareholder return going forward.

While this answer captures the essence of why some banks trade at valuations that are twice or three times the valuation of other banks, this explanation is too general. A more precise answer is that different things drive bank stock valuations at different times.

This is a point that Richard Bove of Rafferty Capital Markets discussed in a recent note to clients. His breakdown is excellent and well worth sharing with the broader investing world.

A brief primer on book value
The difference between a bank’s assets and liabilities is its equity, or book value. This is the amount of money that, theoretically speaking, would be left over to distribute to shareholders after a bank sells its assets and pays its liabilities.

Importantly, however, this is not what a bank is “worth” on the public markets. This estimate comes instead from a bank’s market capitalization, which is its current share price multiplied by the number of outstanding shares.

As you can see in the table below, there can be large differences between banks’ market capitalizations and their book values. Wells Fargo’s market capitalization exceeds its book value by $107 billion, or 57%. Alternatively, Bank of America’s market capitalization is $65 billion, or 26%, less than its stated book value.

Metric Wells Fargo Bank of America
Outstanding shares 5.15 billion 10.47 billion
Current price per share $57.50 $17.66
Market capitalization $296 billion $185 billion
Book value $189 billion $250 billion
Valuation 1.57 times book value 0.74 times book value


What drives these differences? The answer is that investors aren’t looking simply at a bank’s current book value; they’re projecting it into the future. A bank expected to grow its book value at a fast pace will trade for a higher valuation than a bank expected to boost book value at a slow pace, or perhaps even see its book value decline.

What drives book value?
The key to the entire analysis is to determine which factors have the biggest impact on the expansion or contraction of a bank’s book value. And it’s here where Bove’s analysis is so insightful.

Bove argues that the most important factors impacting a bank’s book value are a moving target, alternating between three options:

  • When the economy is headed into a recession, and thereby triggering higher loan losses, a bank’s loan quality is the most important factor in its valuation. This is because loan charge-offs come directly out of a bank’s book value.
  • When loan quality is stable, as it is now, then the onus switches to the direction of interest rates. Although climbing rates have a tendency to depress book value in the short run, as the value of a bank’s assets generally goes down when rates rise, the exact opposite is true over the long run, as asset-sensitive banks are positioned to earn more net interest income when rates are high.
  • Finally, when both loan quality and interest rates are stable, then a bank’s earnings has the biggest impact on book value, and thus becomes the most important variable for bank investors to analyze.

If you think about where we are right now, this all starts to make sense. As credit losses from the financial crisis have bottomed out, most bank analysts and commentators (me included) have shifted to talking about the impact of higher interest rates on banks’ book values and bottom lines. When I’ve been interviewed of late, this is always one of, if not the, principal questions I’m asked.

The lesson for bank investors is accordingly twofold. First, you have to be flexible in your analysis to account for the evolving impact of credit losses, interest rates, and earnings on bank valuations. And second, you need to have a rough idea of where we’re at in the credit and interest rate cycles, as that will tell you where to focus your energy and analysis.

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