The Facts Show that the Bears Are Wrong about Facebook Stock
Facebook Inc (NASDAQ:FB) has lost over five percent after announcing its third-quarter earnings. Have investors suddenly lost faith in Facebook stock? A lack of faith might be the only way to describe it because, on paper, Facebook delivered great results. Such was Wall Street’s surprise—or dismay—at Facebook’s results that much of the NASDAQ also went south in a hurry on Thursday.
So, what’s eating Facebook stock? Is Facebook no longer the supreme darling of social media? The facts speak clearly. Facebook continued to show very strong growth in the third quarter, yet investors are beginning to fear a slowdown in mobile advertising, the very thing that has powered the company’s revenues.
Other than the electoral uncertainty—and the fact that Donald Trump’s rise in the polls scares Wall Street oligarchs—the search is short. The influential analysts at Oppenheimer Holdings Inc. (USA) (NYSE:OPY) have reiterated their “outperform” recommendation for FB stock, but they have drastically lowered their target price.
Facebook Stock May Have Fallen Victim to the Overall Sensation of Uncertainty
Investors’ fears about FB stock may have been accentuated by the uncertainty over the U.S. election. On November 8, a winner will be declared, but many— perhaps more than in any U.S. political confrontation—will be left disappointed. This means that social, as well as political, division will ensue.
This fear has clouded over the markets, highlighting the market risks rather than the potential. Meanwhile, another fear that FB stock investors have is regarding mobile advertising revenue. They have reason to worry, but they should not, because mobile advertising has increased, fueling the exceptional results of Facebook’s third quarter.
Since the digging into Facebook itself has not yielded any clues as to the sudden five percent drop of Facebook stock, the search for answers must shift to external factors.
Oppenheimer analyst Jason Helfstein indicates that, although Facebook’s third-quarter earnings are one percent higher than expected, the result is less amazing than the surprise of the seven percent increase in the second quarter. Helfstein further notes that Facebook management warns that the growth of advertising revenue could decrease significantly. The bullish retort is that, even if advertising revenues were to drop, it would follow a 57% rise in the latest quarter. (Source: “Facebook slide on management caution prompts chorus of ‘buy the dip’,” The Fly, November 3, 2016.)
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Are Two Words to Blame for FB Stock’s Decline?
The fact that Facebook’s management—not the big “Zuck” himself—used the adverb “meaningfully” to describe the potential advertising drop, and the adjective “aggressive” to describe Facebook’s investments over the next year, has spooked investors. (Source: “How Two Words From Facebook’s CFO Are Costing Mark Zuckerberg Billions,” Forbes, November 3, 2016.)
Setting aside the fear and looking at the facts should revive bullish sentiment in FB stock. Indeed, the only possible reading of Facebook’s latest results is that it seems unstoppable. One statistic says it all: in the third quarter, the online social network earned a record profit of $2.3 billion. More impressive is that this figure was 165% higher than the one in Q3 2015. In other words, Facebook has once again proven it’s a real moneymaker.
Revenues increased 50% over the same period last year in the latest quarter, amounting to $7.1 billion. As for user numbers, the important barometer of a social media company’s potential, Facebook can count on some 14% of the world’s entire population. It has 1.09 billion users. Oh, that’s just on mobile. The combined mobile and desktop number is closer to a quarter of humanity: 1.79 billion active users.
Clearly, nothing in the company’s performance can explain Facebook investors’ bearish reactions. If there is one risk, it is that the relentless growth of its core business has made Facebook overconfident, perhaps even brash. In fact, not only is Facebook dominating the social media space—and the advertising that goes with it—the company has started to invest in research and development beyond its natural space.
There’s a little of Elon Musk or Jeff Bezos in Facebook CEO Mark Zuckerberg. Under his leadership, Facebook has invested $4.35 billion—about 24% more than in the previous year—in special and expensive projects ranging from drones to virtual reality (VR). But the numbers say that’s not a problem, because Facebook’s operating margins have actually improved, increasing by 45% this quarter. That’s an increase of 13% over the same period last year.
But even if management’s semantics may have hurt Facebook stock in 2016, the stock could be heading toward an even more bullish 2017. All of the indicators that count were exuding bullish confidence, and the $150.00 price target looks more realistic than ever. As for the advertising volume fears, even if the amount drops, there is an inevitable price increase that could be applied.
The ever-rising number of users that Facebook reaches is what makes this possible. Investments may hurt margins but, so far, it seems that margins are getting wider, despite the variety of new projects. So, ultimately, blame the bearish response to fear. The rational arguments only suggest bullish scenarios for FB stock.