Select Page

One of the biggest weeks in the 4Q18 earnings cycle is winding down now with only Ventas (VTR: $64, up 2% this week) left to report. Let's catch up on yesterday.

Expedia (EXPE: $128, up 5% and then rallying another 8% overnight) was the clear star of the day and one of the biggest hits of the cycle so far, up there with Paycom Software, Apple and Facebook. The numbers were once again better than we expected, with $2.5 billion in revenue beating our target by 2%, and $1.24 per share in profit well above the $1.07 our math indicated was coming.
Given the strong overnight rally it's clear we weren't alone in underrating this company. Of course we were Expedia fans a year ago down at $106, so all we need to do is sit back and enjoy. Management turned an 11% uptick in sales into 47% richer profit.
Expedia is in the sweet spot and growing like a startup thanks to its burgeoning hotel booking business, Airbnb-like home rental and so on. The stock was attractive yesterday morning at 20X earnings. Here at nearly double the growth rate, a much higher multiple is reasonable. Either way, our $138 Target is under attack. We'll update you if we need to raise the bar, but for now, the stock is up 31% after a challenging year.
Reaction to Synaptics (SYNA: $41, up 2%) was less dramatic, but short sellers are committed to buy back 20% of this $1.3 billion company when they want to cover their positions. We love the shorts. It's the closest thing to a sure thing the market ever gives us.
Synaptics did well and expectations were already low. Logging $425 million in revenue was frankly heroic given the cross currents in the legacy smartphone component market as well as the more advanced Internet of Things devices that now increasingly rely on Synaptics technology. We were braced to see the number come in $3 million lower, but as it is there's virtually no year-over-year erosion at all.
That's a great thing. This company was under pressure but has pivoted its operations away from known weakness back to strength. As the old business lines recede and the new ones expand, we'll see growth reaccelerate. In the meantime, it's hard to argue with a management team that can take stagnant revenue and turn it into 40% profit growth.
We were only expecting an 11% margin but Synaptics gave us closer to 13%, which is enough to translate into $1.55 per share when $1.33 was all we needed, and that was compared to $1.10 last year. Let the short sellers get nervous. We were getting a bit bored with this company but now it's back in the game . . . and we're starting to understand why management remains so coy about accepting acquisition offers when they're successfully turning the enterprise around.
Twitter (TWTR: $31, down 7%) surrendered the progress earned in the last two weeks of heavy lifting. We aren't hugely concerned. For one thing, we recommended Twitter early enough in its rebound that it's still up 10% from our initial Research Report in September, compared to a 7% decline in the market as a whole over the same period. That's strength.
For another, the numbers weren't awful. While a net 5 million people dropped off the platform in the quarter, much of the decline came from accounts that Twitter had to aggressively prompt via email and expensive text messages to keep coming back. Losing them stings but doesn't really hurt the business. If anything, it helped boost overall profit to $244 million or $0.33 per share. We were expecting 28% less.
Granted, the first quarter is generally tough so our expectations aren't high. But there's still 321 million people active on Twitter and even if the revenue numbers bounce around, management is clearly finding out how to monetize that audience. With $909 million in 4Q18 revenue on the books, Twitter is growing the top line 6% faster than we anticipated -- and at quadruple the 6% rate that revenue is increasing for the S&P 500 as a whole. In the long haul this is a good place to be. Let the storm pass.