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On the whole we're pleased with the way the 4Q19 earnings cycle is playing out, at least as far as the raw numbers go. Investor reaction, as always, will take a little time to align with the fundamentals . . . and a fresh round of reports will hit us today.


Facebook (FB: $223, up 2% early this week and then down 7% overnight) is a great demonstration of what we consider short-sighted investment logic. Mark Zuckerberg hit all his targets with a round $21 billion in revenue turning into $2.56 per share in profit. We were only expecting $20.9 billion and $2.52, so we're happy. And our projections were roughly in line with the rest of Wall Street . . . if anything, compared to everyone else we were a touch more reserved (for once) when it came to earnings per share.


So is the stock down? First, consider the historical situation. Facebook soared 48% over the past 12 months, literally running circles around the S&P 500. Some investors were undoubtedly eager to take a little profit after that big bull run, and as long as the quarterly numbers weren't too much better than expected they figured it was time to go.


But anyone who says expenses were too high or the growth rate was too small just hasn't been paying attention. Facebook was very clear throughout last year that costs were coming in at least 53% above 2018 levels. Nobody raised an eyebrow then. Here we are looking at a 51% uptick in expenses (as we discussed in our Earnings Preview) and there is zero reason to complain. We all knew this was coming. Likewise, nobody should act shocked at only a 25% revenue growth rate. As Zuckerberg says, the business is maturing here, as befits one of the biggest companies on the planet.


The outlook isn't bad either. We were looking for revenue growth to flatten to around 22% in the current quarter. Facebook's latest projection is an almost perfect match. If that's not good enough for people, they should have left months ago. But instead of leaving, investors kept piling more money into this stock. They were enthusiastic, with good reason. We're still enthusiastic.


Remember, Silicon Valley runs on what they call the Law Of 40. If your revenue growth rate and your profit margin add up to more than 40, you're doing well. Facebook is confident that they'll end 2020 with roughly 20% growth and margins north of 30%. That's a win.


Likewise, PayPal (PYPL: $117, flat early this week but down 2% overnight) is in the Law Of 40 zone, with 17% revenue growth and roughly 24% of it turning into profit. If anything, we would have been content with a little more pressure on the margins, given the fact that the company has been such an aggressive consolidator and acquisitions cost money. Instead, PayPal gave us close to $5 billion in revenue and $0.86 per share in profit . . . a little better than expected on both sides.


Guidance is a little lighter than we wanted on the bottom line, but again, that's more a factor of acquisitions than real operational challenges. After all, margins are still widening (up a full 2 percentage points last year alone), which means any growth at all translates to richer economies of scale and continued success for shareholders. The stock usually drops after earnings. It will be back.


Then there's Microsoft (MSFT:  $168, up 2% and then breaking records overnight), which needs no patience at all. The Azure business is expanding at a phenomenal 62% rate, giving the overall company the juice to report $36.9 billion in revenue and $1.51 per share in profit. That's massive. We're looking at 14% sales growth raising the bottom line 31% a year. Huge. While China could be a drag on Office in the current quarter, guidance indicates more of the same.




Earnings Preview: Eli Lilly (LLY: $140, up 1%)

Earnings Date: Thursday, 8:00 AM ET 

Expectations: 4Q19
Revenue: $5.9 billion
Net Profit: $1.4 billion
EPS: $1.52


Year Ago Quarter Results
Revenue: $6.4 billion

Net Profit: $1.3 billion
EPS: $1.33


Implied Revenue Decline: 8%
Implied EPS Growth: 14%


Target: $145
Sell Price: $93
Date Added: December 13, 2016
BMR Performance: 110%


Key Things To Watch For in the Quarter


Like a lot of world-class companies, Eli Lilly smooths the slow spots in the global product cycle by buying enough stock to keep its per-share performance flying. That's what's happened here, with stalled revenue turning into healthy growth when you account for the impact of 90 million fewer shares than there were a year ago. We've gritted through the slowdown and now can look forward to real organic expansion again now that Eli Lilly's new drugs are getting traction.


The outlook is critical here. After a gloomy 2019, we want to be sure Eli Lilly is back on track to deliver at least 7% better sales this year. In that scenario, the grudging earnings growth management was able to squeeze over the last few quarters turns into blockbuster performance for the foreseeable future. The so-called "patent cliff" left behind when Cialis protections expired is behind us now. Time to see what this company can really do.




Earnings Preview: Visa (V: $117, flat)

Earnings Date: Thursday, 5:00 p.m. ET

Expectations: 4Q19
Revenue: $6.0 billion

Net Profit: $3.2 billion
EPS: $1.46


Year Ago Quarter Results
Revenue: $5.5 billion

Net Profit: $3.0 billion
EPS: $1.30


Implied Revenue Growth: 10%
Implied EPS Growth: 12%


Target: $200
Sell Price: We would not sell Visa.
Date Added: February 12, 2016
BMR Performance: 191%


Key Things To Watch For in the Quarter


Much like PayPal, Visa is a growth machine . . . only on a vastly larger scale. Margins remain well above a staggering 50% as the company's platform spreads around the world, which means that for every $2 booked as revenue, a full $1 turns into profit. In other words, top-line growth carries to the bottom line on roughly a point-for-point basis. We've seen roughly 10% expansion on the top and on the bottom for years. We're likely to see it continue for the foreseeable future. Watch for hints on China for a sense of how bad management thinks the situation there really is.




Earnings Preview: Amazon (AMZN: $1,858, flat)

Earnings Date: Thursday, 5:00 p.m. ET

Expectations: 4Q19
Revenue: $86 billion

Net Profit: $2.0 billion
EPS: $4.00


Year Ago Quarter Results
Revenue: $72 billion

Net Profit: $3.0 billion
EPS: $6.04


Implied Revenue Growth: 20%
Implied EPS Decline: 33%


Target: $2,200 
Sell Price: We would not sell Amazon.
Date Added: October 18, 2016
BMR Performance: 144%


Key Things To Watch For in the Quarter


At last. This is the all-important holiday quarter, accounting for 30% of Amazon's full-year business. Jeff Bezos has already told us to expect at most $86 billion in sales and warned us to brace for a significant earnings decline, so the bar is set fairly low. With that in mind, investors will fixate on Web Services as the most dynamic segment of the sprawling operation. Anything more than 35% growth on that side will be a good thing, especially considering that the unit generates 70% of Amazon profit even though it isn't even 15% of the top line. 


Either way, it's gotten expensive for Amazon to perpetuate its growth curve. Watch the discussion around shipping and Streaming Video production costs very carefully. As long as Bezos can convert that investment into market share gains, he's on track with his long-term plan. Everything else can wait.