Twitter Stock Surges After-Hours On Earnings Beat; New U.S./E.U. Sanctions On Russia — Where They Will Hurt The Most
Shares of the social media giant Twitter (TWTR) surged in after-hours trading after beating on earnings and just about every other category of importance. “I can’t find anything that they didn’t beat on. This was a very positive report for Twitter,” said Robert Luna of Surevest Wealth Management during an interview on CNBC this evening. “There’s a lot of room for expansion, a lot of room for multiple revenue sources.
As of this note, TWTR shares are trading up $11.39, or 30 percent to $50 per share. All of these gains came after the market close, as TWTR closed today up 66 cents, or 1.74 percent to $38.59. The company reported earnings of 2 cents per share versus a loss of 12 cents one year ago/second quarter of 2013. Second quarter 2014 revenue was $312M, a 124 percent gain in quarterly revenue versus the second-quarter in 2013. Most analysts had expected the company to report a second quarter loss of a penny per share versus the 2 cent gain, according to Thompson Reuters. Monthly average users also grew 24 percent year-over-year, to 271M versus expectations of 267M. The company added that it also expects to post ad sales of between $1.31B and $1.33B this year which is also higher than most Wall Street firms’ expectations.
Not everything came up roses for the company. Average user growth per month slowed to 25 percent in the second quarter; and, some firms expect that trend to continue.
So, unless, you had the access and the ability to trade after the market close — which is risky — you likely missed out on this intermediate gain. A thirty percent gain in one evening is insane; and, I personally would not be a buyer of the stock at these levels; but, would do so on pullbacks in the market — not related to anything fundamental to do with Twitter. When the market corrects, it usually takes the good, down with the bad, and that is when to take advantage of good companies like Twitter.
Going into today’s earnings report, Twitter had been rated a buy by 12 of the major Wall Street firms; while, 19 recommended holding; and, 6 recommended selling. This kind of massive move this evening is likely to be met tomorrow morning by some selling; although, it isn’t likely to be major IMO. Instead, a period of consolidation in the $45-$55 range is probably more likely, at least till we get to the fall. We’re also likely to see a string of upgrades from the street and I would expect many of those 19 holds will move or changes to buys and outperforms.
Longer-term, I like Twitter and will likely buy and begin to get a footprint in the stock on pullbacks. But, in the meantime, I bought more FaceBook today as well as shares in a very speculative bio-tech, Synthetic Biologics (SYN); and, am closely watching Arrowhead Research Corp. (ARWR) for buying shares in the company.
New Sanctions For Russia — Here’s Where They’ll Hurt
John Schoen, writing on CNBC’s website this evening discussing the decision today by the U.S. and the E.U. to increase economic sanctions against Russia in the aftermath of the shoot-down of Malaysian Flight MH17 by pro-Russian separatists in Ukraine. Mr. Schoen writes that these latest sanctions, “target key specific sectors of the Russian economy: defense, finance, and energy. Those include an embargo on arms sales to Russia; a ban on exports of so-called dual-use goods, such as computers and equipment that could have civilian and/or military uses; cutting Russian banks from European markets; and, an embargo on the sharing of high-tech methods and techniques related to the Arctic, shale extraction, and deep-water drilling.
As Mr. Schoen notes, “these moves will further increase the risk that Russia raises the stakes in its widening economic trade war with the West.” “And,” he adds, “both the Russian and European economies can ill afford any economic slowdown. With an economy roughly the size of Italy’s, Russia will feel pain more intensely. Existing sanctions have all but wiped out Russia’s existing GDP growth (+0.1),” he notes; and, these latest sanctions could result in an economic recession for Russia in the second-half of 2014.
The Euro Zone economies aren’t doing much better, as Mr. Schoen notes that “GDP in the Euro Zone expanded just .2 percent in the past quarter, less than expected.” “Still,” he says, “even Europe’s largest exporter, Germany, sent only 3.2 percent of its goods and services to Russian in 2013, — accounting for just 1.2 percent of Germany’s GDP,” according to Capital Economics. “Other Euro Zone countries may take a bigger [economic] hit,” writes, “but, the overall [negative] impact [of the sanctions] on growth could be relatively small.”
Among the sanctions announced today, “the capital restrictions are expected to have the most damaging [negative] effect on Russia,” Mr. Schoen wrote. “Last week,” he notes, “the Russian Central Bank raised interest rates from 7.5 percent to 8 percent — the third hike this year — in order to try to stem capital outflows; and, tamp down rising inflation. With Russian banks and private companies already suffering from capital flight, the restrictions on Western capital/financing, — will squeeze them even harder,” he wrote. “If nothing else, the pickup in investment needed to revive Russia’s ailing economy, is starting to look ever more unlikely,” Capital Economics wrote in a note to their clients. Meanwhile, “the Russian stock market is down 7 percent this month (July); and, yields on government bonds have jumped to more than 9.5 percent,” Mr. Schoen wrote. “If left in place for an extended period of time,” he adds, “the sanctions could cost investors in the Russian market as much as a trillion dollars,” according to The Economist.
European Banks, Especially British Banks, Will Also be Hit Hard
“The loss of Russia as a borrower will also hurt European banks, especially those in the United Kingdom,’ Mr. Schoen wrote. “It also raises the prospect that Moscow could retaliate — by defaulting on outstanding loans,” he added. But, Wells Fargo’s Chief Global Economist, Jay Bryson, estimates that the [financial] risk to Western bankers is fairly low.
“Of the roughly $200B Russia owes the U.S., and European banks, France has the largest exposure, — with $47B in loans outstanding, or about 23 percent of the country’s foreign bank exposure,” Mr. Schoen wrote. “American banks hold $27B (13 percent of the total) worth of Russian debt, followed by Italy, Japan, Germany, the Netherlands, and the U.K. Together, those seven countries account for 80 percent of the foreign bank exposure to Russia.”
Energy Risks For Russia
“Much of the potential risks of wider sanctions has focused on Europe’s dependence on Russian energy. But, even there, Russia would likely come up on the losing end of any effort to cut off supplies,” Mr. Schoen says.
“Germany, for example, gets some 40 percent of its natural gas from Russia, but gas makes up only 20 percent of Germany’s overall energy consumption,” notes Julian Jessop, Capital Economics Chief Global Economist. Mr. Jessop warns that if Russia does “turn off [Europe’s] gas,” — “Germany could boost gas imports from other suppliers, through pipelines from Norway, and the Netherlands, as well as draw on existing stocks.” “Other countries reliant on Russian gas, like Italy and Turkey, could increase imports from North Africa and the Middle East,” noted Mr. Schoen. “Russia would also sorely miss revenue from energy sales,” he added, “which account for about two-thirds of the country’s exports — or, about 20 percent of Russia’s GDP.” “An energy embargo, even for a short period of time, would plunge the already-weak Russian economy into a deep recession,” said Bryson.
Impact Of Dual-Use Technology Sanctions Against Russia
“The impact of the embargo on arms sales; and, dual-use equipment is harder to predict,” wrote Mr. Schoen. “France stood the most to lose from the arms embargo, thanks to a $1.2B order to deliver two warships to Russia. But, the sanctions reportedly apply only to future deals. Russia has few other major, outstanding defense contracts with the U.S., or other European defense contractors,” he noted.
“The ban on exports of dual-use equipment casts a wider net, however, and could represent a larger loss of exports to Russia cross the U.S. and Europe,” concluded Mr. Schoen. “But, the sanctions leave it up to the seller — to determine whether its products are going to end up being used by the Russian military.”
Companies Fear Russian Sanctions Impact
The Financial Times is reporting this evening, that British Petroleum (BP) and the auto-maker Renault, are among the first large European companies “to warn of the potential impact sanctions against Russia — on their business [and bottom lines], as the E.U. and the U.S. prepare to impose far-reaching restrictions on Russian companies operating in the West.” There will most certainly be others.
What impact, might these new sanctions have on the U.S. stock market? So far, the market has ignored geo-political events and instead — focused on corporate earnings and the Federal Reserve. But, with August approaching and second quarter earnings set to be mostly over by the first week in August — will the dog days of August finally be the time this market decides to focus its attention across the pond? If it does, we might finally see that 10 percent pullback ‘everyone’ has been calling for. V/R, RCP