Since reporting Q2 earnings on July 25, Facebook (NASDAQ:FB) has fallen from an all-time high of $218.62 to $174.4, as of Aug. 23. The mood during the conference call was solemn as FB downgraded sales growth expectations for the rest of the year. And this gloomy report led to an infamous, one-day drop in Facebook stock of 20%, where it lost a historic $120 billion in valuation.
So what should FB stock investors expect after all the post-earnings headlines and headaches?
Here are three cons to Facebook stock and three pros.
Three Cons for Facebook Stock
Cambridge Analytica Scandal: Since Mar. 2018, Facebook has been in the center of damaging scandals over the placement of ads on its platforms to affect voter opinion, especially during the 2016 U.S. presidential election as well as the 2016 European Union referendum and 2017 national election in Great Britain. While the data breach issues have snowballed since spring 2018, the company and FB stock have faced an uphill public relations battle. CEO Zuckerberg has had to appear before lawmakers in the U.S. and faced questioning.
Authorities, especially in the E.U. have enacted tougher privacy laws and there has been a shift in the global political environment whereby more countries are calling for tougher regulation of the technology giants, including Facebook.
In mid-July, the U.K.’s privacy watchdog said FB would be fined for a data protection violation and lack of transparency. As a result, Facebook has been actively purging fake or troll pages, especially from Russia, over the past few weeks. Furthermore, Zuckerberg has promised increased transparency for political ads and more control over third-party use of the data. Since early spring, the price volatility in Facebook stock reflects the company’s continuing difficulties in containing the damage caused by the start of the data privacy scandal.
Risks in User and Revenue Growth: It may not be wrong to say that recently Facebook has become both the most used and the least trusted social network, creating not only a public relations dilemma but also a decrease in user and earnings growth for the company.
The July 2018 earnings report showed instability in user growth, while FB’s quarterly sales fell short of expectations. This led to a massive drubbing in Facebook stock. About 3 million E.U.-based users “unfriended” Facebook in Q2, as, like other social media companies, it implemented changes to comply with the E.U.’s new privacy rules, General Data Protection Regulation (GDPR).
There is also anecdotal evidence that some users are likely to self-censor their FB usage. For example, in an August survey among Black Hat USA security conference attendees, cybersecurity pros have said that they are decreasing their use of Facebook. About 65% of those surveyed said that they were either limiting their use of Facebook or not using it at all after the recent controversies. Since FB’s Q2 earnings call, investors have been rightfully concerned that revenue growth and/or earnings could further decelerate; worries about the rest of the year have also been refueled.
Shorter-Term Technical Analysis: After investor’s harsh response to the Q2 earnings report, FB stock has suffered from a damaging technical picture. Its short-term technical chart still looks weak, and it is pointing to the possibility for more downside around the corner.
Although FB’s momentum indicators, which describe the speed at which prices move over a given time period, are currently in oversold territory, they can stay oversold for quite a long time, especially when the overall trend is down. Therefore, more buy signals based on momentum indicators need to be confirmed with further chart analysis before the stock is a buy from a technical standpoint.
If you still believe in the bull case for Facebook stock, you might consider waiting for a better time to get long, such as around low $150 or even mid $140 levels. The 52-week low of $149.02 was seen on Mar. 28, 2018 and FB will likely test this level again, especially if there is any general weakness in the tech sector or negative company specific news. Short-term support for FB is first at $171 and then at $152; meanwhile, short-term resistance in FB stock is first at $193 and then at $218. Expect nearer-term trading to be choppy at best, possibly until the next earnings report on Oct. 24, after the market closes.
Three Pros for Facebook Stock
Market Capitalization: With a market cap of almost $500 billion, it would be safe to assume that FB stock is unlikely get held down by the market for too long.
The Street tends to regard large market cap companies as good and stable long-term investments. Even though FB’s current business model has been affected by the Cambridge Analytica scandal, the public backlash on questionable data usage as well as fake news and the following uncertainty over technology sector’s regulatory environment, the most recent Daily Active Users (DAU) number is approximately 20% of the global population. Furthermore, Facebook and Google’s — parent company Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — combined share of the U.S. digital ad market duopoly is still well over 50%.
Facebook users are not only individuals, but also institutions, businesses of all sizes and organizations, including workplaces, community centers, schools and even places of worship. Although other competitors, especially Amazon (NASDAQ:
AMZN) with its disruptive character, are slowly becoming contenders, Facebook, like Google, is still the choice of senior ad buyers as it holds extensive demographic data that enables advertisers to target audiences effectively. The most recent quarterly report actually showed its profits have gone up to $5.1 billion, thanks to a sharp increase in sales of mobile video ads.
Other Potential Areas of Monetization: Another promising aspect for Facebook stock is that the company is still in a prime position to add different areas of compounding growth to its bottom line in the near future.
In 2017, FB launched its video platform, Facebook Watch, an ambitious company priority, as a rival to YouTube. As Chris Belli at Studio Science summarized for US News, “They’ve secured streaming rights to some big events, added a video tab, released an app for Apple TV, and are experimenting by making the camera a more prominent feature of the mobile product.”
Their ever-popular platform Instagram is not yet fully monetized and thus has considerable room for growth. Similarly, for its messaging apps, Facebook Messenger and WhatsApp, services like payments, chatbots and videoconferencing are potential areas of revenue increase. The market is also ripe for long-term opportunities in virtual reality with applications in gaming and entertainment. Going forward, FB is likely to successfully leverage its network for further sales and earnings growth.
Leadership: Despite the recent troubles the company has faced and the initial criticism of especially how CEO Mark Zuckerberg has handled the early days of the data breach scandal, institutional investors still believe in the leadership behind Facebook stock.
Asset Manager Carol Pepper said on CNBC that “Mark Zuckerberg will continue to defend the company successfully, I think the stock will recover and they’ll continue to be a big cash earner.” The enviable milestones the company and FB stock has reached in its short history would not have happened if the team led by Zuckerberg had not executed the right strategies at the right time and at high speed.
Facebook’s leadership has also never been shy to acquire companies that will enable it to increase revenue and growth and we can expect this trend to continue. As Facebook holds no debt, its executive management can swiftly move the company forward into long-term opportunities.
The Bottom Line on FB Stock
Facebook stock has a strong story and the company has a clean balance sheet, thus it remains a long-term growth play on fundamental basis. However, there might still be stock price weakness in the near-term that potential FB stock investors should anticipate.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
