Market Overview

3 February 2020

Facebook Looks Similar to What it did in Summer 2018, but a Little Better

Many companies have recently released their corporate reports for the fourth quarter of 2019 and a number of them seemed to have performed well, with the reports pointing to perfect figures, but still accumulated some "dead weight" inside to drain away. One such case is Facebook, Inc. (FB), which also owns popular services like WhatsApp and Instagram. Mark Zuckerberg's social media giant reported last Wednesday its highest-ever earnings of $2.56 per share (EPS) on also historically high revenue of $21.08 bln. These figures have even overthrown the estimated $20.89 bln by Bloomberg expert poll. But, the majority of investors seem to concentrate more on the slow rate at which revenue is growing for FB, which was up by 25% as compared to the fourth quarter of 2018. Over the previous two years, the revenue growth for FB was 30.3% and 47% respectively.

The most important "detail" in the report was the official statement of the company's representatives that further revenue growth continues to slow as Facebook business matured. "We expect our year-over-year total reported revenue growth rate in Q1 to decelerate by a low- to mid-single digit percentage point as compared to our Q4 growth rate," Facebook's CFO David Wehner said on the earnings call. Wall Street was disappointed by expected surge in quarterly expenses: Facebook reported total costs and expenses increased 34% to $12.22 bln in 2Q2019, compared with just 14% that analysts had as an average forecast.

As future estimates were not strong enough, the shares of the world's biggest social network dropped by 7.2% immediately after the market closed during the evening trading session of Wednesday. The opening price on Thursday, January 30 was near $206, just after a fresh historical all-time high of $223.23 a day before. FB shares reached at $201.91 at the end of the week.

Further movement may be estimated controversial, but it's worth mentioning the striking similarity of the present situation with Facebook shares' reaction in July 2018, when the price dropped that time a historical maximum almost 20% from $218 to $175 in one night,. This happened after the company hinted at a slowing down of the pace over the months to come.

In 2018, the prices went down through Christmas time, reaching even below $123. It maybe assumed that some part of this way down could be relived. Just from the technical point of view, it may be reasonable to project the present movement to reach at least the$180 - $185 area. The report already drowned the company's capitalization to a deep correction period, so it could take time and a further drop before it can rebound again. However, fundamentally the company became much stronger over the last two years in terms of absolute revenue; with 2.7 bln of unique active users for Facebook, Instagram, WhatsApp and FB Messenger combined every month, including more than 2 bln active users on a daily basis. Facebook can effectively convert its business into money on a regular basis, and that means that in 2020 the upward trend for its shares may resume earlier than expected. This could happen at any moment, if the bullish market makes a return in Wall Street after correction.

Measures resulting to changes to privacy policy were announced by Mark Zuckerberg a few days ago could have an effect on the company's future financial results and they could strongly challenge Facebook users' loyalty. The founder of the company said, according to CNN News that "Facebook will stand up for principles like free expression [of one's opinion] and encryption, even if it means facing a backlash".

"This is the new approach, and I think it's going to piss off a lot of people. But frankly, the old approach was pissing off a lot of people too, so let's try something different," Zuckerberg said at the Silicon Slopes Tech Summit in Utah on Friday.

He added that the company's aim for a long time was to not do anything that would be deemed as "too offensive," but it seems that he is changing his mind as to what he deems as excessive censorship. "Increasingly we're getting called to censor a lot of different kinds of content that makes me really uncomfortable," Zuckerberg said, while acknowledging Facebook's responsibility to purge its platforms of content related to terrorism, child exploitation and incitement to violence. We're going to take down the content that's really harmful, but the line needs to be held at some point," Zuckerberg noted.

It could mean that Facebook may come under fire again from the US "democratic" camp headed by Nancy Pelosi and Hillary Clinton, who blamed Zuckerberg of becoming "Trumpian" after his private meeting with the US President. While Twitter decided to ban political advertising Facebook has decided to allow the posting of public opinions, when it comes to politics. This will most probably make Facebook a marketplace for a large spectrum of different views and this may heighten just before the US November presidential elections. Of course, some users will like it, especially among Trump supporters, but many others could be disappointed, and they could be less "Facebook-addicted".

November presidential elections could become an important "deadline" to see the effect. Only time will judge, will the company benefit from new policy or not. Mark Zuckerberg said, "my goal for this next decade isn't to be liked, but to be understood".


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Indiscriminate reliance on illustrative or informational materials may lead to losses.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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