Part 4

Facebook Inc. (FB)

Company Background

As we all know, Facebook Inc. is the world’s largest social media platform. The company’s portfolio of products has substantially expanded throughout the last decade as the company has evolved from a single Facebook app to multiple apps like photo, video sharing and messaging apps like Instagram and WhatsApp. Acquisitions have played a major part in Facebook’s growth initiatives and expansion strategies as both WhatsApp and Instragam were acquired by the company in order to expand its reach and global usage base. Now, along with in-house developed Messenger, these apps now form Facebook’s family of products used by almost 3 billion people on a monthly basis.

Facebook uses metrics like daily active users (DAUs) and monthly active users (MAUs) to measure its user base. As of Mar 31, 2020, DAUs and MAUs were 1.734 billion and 2.603 billion, respectively. Newly introduced metric, which is the family daily active people (DAP) that measures daily users of its family of products, was 2.36 billion.

Headquartered in Menlo Park, CA, Facebook generated revenues worth $70.70 billion in 2019. Advertisement accounted for 98.5% of revenues. Marketers buy ads that can appear on multiple platforms including Facebook, Instagram, Messenger and third-party applications and websites.

Facebook, thanks to its huge user base gained a significant market share in the advertising space wherein it faces tough competition from Google, Twitter, Amazon and Snapchat-parent Snap.

The company’s major competitors in the messaging and advertising space are: Apple (messaging), YouTube (advertising and video), Bytedance (social media) and Tencent (messaging and social media).

Facebook core app enables people to connect, share, discover and communicate with one other on mobile devices and personal computers. User engagement on core Facebook platform is fostered by News Feed that displays an algorithmically-ranked series of stories and advertisements customized for each user. There have been plenty of new Facebook tools and features that have been introduced throughout the last few months including Facebook Groups, Marketplace, Jobs and Gaming.

Instagram is a community for sharing photos, videos and messages, enabling people to discover interests that they care about. People can express themselves through photos, videos and private messaging via Instagram Feed and Stories.

Messenger helps people to connect with friends, family, groups and businesses across platforms and devices. WhatsApp is a simple, reliable and secure messaging application, used by people and businesses around the world to communicate in a private way.

Facebook also offers virtual reality (VR) products through its Oculus division.

Current Position – Financial Performance and Future Growth Prospects

Average Revenue per User (ARPU) growth was highest in the United States & Canada, increasing 13.5% year over year followed by Europe’s 11.4%. ARPU in the Asia-Pacific and RoW grew 10.1% and 5.3%, respectively. Worldwide ARPU rose 8.3% to $6.95.

Facebook’s first-quarter results were better-than-anticipated. Despite a steep decline in advertising revenues in the last three weeks of March due to coronavirus pandemic, advertising revenues jumped 17% year over year (19% at cc) to $17.44 billion.

On the last earnings call the management stated that ad revenues showed signs of stability in the first three weeks of April. Although the metric is steady on a year-over-year basis, trends reflect weakness across the company’s all user geographies due to coronavirus-related lockdowns.

However, Facebook didn’t provide any specific revenue guidance for the second quarter of 2020 as well as the full year due to aggravating macro-economic uncertainty related to coronavirus (COVID-19).

Facebook continues to witness significant traction in online and mobile advertising spending. However, while the online advertising space is growing it is also changing, as there is a new “king” in town when it comes to online ads and that’s – video. The company intends to capture the opportunity presented by ever-increasing video viewing on social media platforms. Online video is the most lucrative component of digital advertising. As video ads generate more revenues than its photo and text-based substitutes, Facebook is trying to incorporate more and more video-oriented content to bring in more ad dollars. The company launched Watch, a dedicated tab for video viewing, to achieve its goal.

The biggest cash cow for Facebook currently is Instagram as it has introduced its ad platform to worldwide advertisers. To attract more advertisers (over 3 million and counting), Facebook has unveiled tools to promote posts and evaluate business performance directly on Instagram. Moreover, the Facebook is also looking for ways to monetize Instagram Stories, and adding the Checkout feature to the platform is a step toward that direction. The feature allows Instagram users to browse and purchase products from 23 top brands in the United States, all within Facebook’s app. Further, solid adoption of the Explore tab, which is used by more than 50% of Instagram users every month, increases the platform’s monetization opportunities. Recently, the company started placing ads on the Explore tab that is expected to drive the top line.

Messenger and WhatsApp are the other extremely prized possessions. Facebook is aggressively working on monetizing the opportunities presented by its subsidiaries. The company is pretty excited as it opened the Messenger app, which has more than 1 billion users, to developers for creating chatbots that would enable businesses to extend customer service and other transactions. Facebook is rewriting the app from scratch to make it the fastest and most secure major messaging platform in the world. It is also working to bring end-to-end encryption and ephemerality to boost user experience.

Technical Analysis

From a technical standpoint the stock looks quite impressive at the moment as it has already broken out above its pre-COVID 19 levels and it’s currently sitting at an all time high. The stock has appreciated substantially in the last 10 weeks moving from the $137 lows up to $240. This represents a 75.2% increase in 2 months for Facebook’s stock, which we now believe is inevitably due for a stronger pullback. As you can see the chart of the stock is slightly different than the charts of XLC and XLK, as the prior all-time highs have already been broken. The main reason for the significantly stronger upward momentum for the stock could be attributed to the fact that in some instances Facebook was created for the current home-based environment. The continued digitalization of the business world has led to increased business advertising volumes, which in turn has proven to be extremely beneficial for Facebook’s top line. The strong initial and significantly overextended rebound combined with the seemingly successful but still relatively weaker attempt for overtaking its all-time highs on lower than average volumes, are some of the main reasons why we advise our followers to be cautious moving forward. Additionally, even though that the RSI is trading above 60 it is also indicating that the most recent strong price appreciation might not be as strong as it seems on a relative basis. The current RSI reading is lower than the one we saw back at the February highs, even though that the actual price is trading roughly around $20 higher today, than back then. This in turn could be an indication for a possible short-term weakness for the stock in the coming days and weeks. However, we believe that a bigger decline in the stock would present a tremendous long-term buying opportunity for our followers.

We will be interested in opening our initial BUY positions around the $200 support zone and then in case the price continues to slide we will look to further add to our long Facebook exposure at the $180 level. On the upside we will be targeting the $240 and $260 levels for collecting our profits from the stock.

Salesforce Inc. (CRM)

The company was founded back in 1999 and it’s headquartered in San Francisco, CA. Salesforce.com has established itself as the worldwide leading provider of on-demand Customer Relationship Management (CRM) software with the remarkable 20% market share. Its nearest rival, SAP is way behind at a market share of around 8%. About 90% of the Fortune 100 companies uses at least one Salesforce software. The company’s products and services enable organizations to better manage critical operations, such as sales force automation, customer service and support, marketing automation, document management, analytics and custom application development.

The company has leveraged its expertise in on-demand software to increase its scale of operations. It also offers a technology platform for customers and developers to build and run a variety of business applications.

The reason why Salesforce is uniquely positioned to continue growing in the future is associated with the fact that the company solves a very important problem that organizations of all sizes are facing on a daily basis all over the world – the communication with their clients. Salesforce helps companies of every size and industry to connect with their customers in new ways through existing and emerging technologies including cloud, mobile, social, IoT and artificial intelligence (AI).

Rapid digital transformation and the company’s sustained focus on introducing more aligned products as per customer needs is driving its revenues higher. Over the last five years, Salesforce’s annual revenues have tripled from $5.4 billion in fiscal 2015 to $17.1 billion in fiscal 2020.

The two main revenue streams for the company are: Subscription and Support and Professional Services & Other.

Subscription revenues are the largest revenue generator for Salesforce as they include subscription fees from customers, accessing the company’s enterprise cloud computing services (Cloud Services), software licenses and subscription fees recognized from customers for additional support beyond the standard support lent by the company. This segment accounted for more than 94% of Salesforce’s fiscal 2020 revenues.

Professional Services & Other revenues consist of fees that the company derives from consulting and implementation services and training. This segment accounted for the remaining 6% of Salesforce’s fiscal 2020 revenues.

Current Position – Financial Performance and Future Growth Prospects

The company dominates the market owing to its strong clientele. Per IDC’s Worldwide Semiannual Software Tracker, salesforce remained the #1 CRM providers for the seventh straight year, demonstrating the attractiveness of its cloud-based solutions. The company cemented its overall market share position and inflated its revenue base more than any other CRM vendor, the firm added. Management intends to double the company’s top line by fiscal year 2024 with a revenue target of $34-$35 billion, thus making it the fastest enterprise software entity to attain that milestone.

The company has various SaaS applications and platforms to serve its focus areas. SaaS deployments are easy and help to reduce ownership costs for customers. The company’s ability to provide an integrated solution for customers’ business problems is the key growth driver. According to IDC estimates, spending on public cloud services will grow from $229 billion in 2019 to nearly $500 billion by 2023, at a CAGR of 23%. Per a ResearchAndMarkets.com report, the global CRM software market, valued at $25.5 billion in 2018, is projected to reach $36.53 billion at a CAGR of 9.4% through 2022. With its SaaS-based CRM and social enterprise applications, we think that salesforce is well-positioned to lead the market.

The overall acquisition activity that the company has shown is one of the key growth strategies, strengthening Salesforce’s position in the CRM solution-providing space. Notably, buyouts of Tableau, ClickSoftware, Mulesoft, Datorama and CloudCraze over the last couple of years have been immensely lucrative for the company. Salesforce’s partnership agreements with the likes of Amazon and Alphabet for the firms’ cloud services have been helping it expand its international operations. In keeping with its strategy of growing in Europe, in Aug 2015 Salesforce’s investment arm, Salesforce Ventures, announced its decision to invest $100 million specifically in European start-ups.

From a purely financial standpoint Salesforce is a cash rich company with a strong balance sheet. As of Apr 30, 2020, the company had cash and cash equivalents of nearly $9.8 billion, which is significantly higher than its long-term debt (including current maturities) of approximately $3.4 billion. Since it has net cash available on its balance sheet, the existing cash can be used for pursuing strategic acquisitions, investment in growth initiatives and distribution to shareholders. Additionally, Salesforce’s total debt to total capital ratio of 0.09 is significantly lower than the industry average of 0.5.

Technical Analysis

From a technical standpoint the stock looks quite impressive at the moment as it is challenging its pre-COVID 19 levels and it’s currently sitting 3-5$ from its all time highs. The stock has appreciated substantially in the last 10 weeks moving from the $115 lows up to $190. This represents a 63.5% increase in 2 months for Salesforce’s stock, which we now believe is inevitably due for a stronger pullback. As you can see the chart of the stock is very similar to the charts of XLC and XLK, as the price is again approaching its pre-COVID all-time highs on a lower than average volume and certain exhaustion patterns could be easily observed across the 3 charts. The main reason for the strong upward momentum for the stock could be attributed to the fact that in some instances Salesforce was created for the current home-based environment. The continued digitalization of the business world has led to an increased demand for business control systems, which in turn has proven to be extremely beneficial for Salesforce’s top line. The strong initial and significantly overextended rebound combined with the seemingly successful but still relatively weaker attempt for overtaking its all-time highs on lower than average volumes, are some of the main reasons why we advise our followers to be cautious moving forward. Additionally, even though that the RSI is trading above 60 it is also indicating that the most recent strong price appreciation might not be as strong as it seems on a relative basis. The current RSI reading is lower than the one we saw back at the February highs, even though that the actual price is trading roughly around the same levels today as it was back then. This in turn could be an indication for a possible short-term weakness for the stock in the coming days and weeks. However, we believe that a bigger decline in the stock would present a tremendous long-term buying opportunity for our followers.

We will be interested in opening our initial BUY positions around the $170 support zone and then in case the price continues to slide we will look to further add to our long Salesforce exposure at the $155 level. On the upside we will be targeting the $195 and $210 levels for collecting our profits from the stock.

We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the SPY and XLY that have a big impact on the overall performance of the two ETFs.

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Sincerely,

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