Facebook (NASDAQ:FB) is expected to report earnings on Oct. 30. The final quarter promises to be another volatile one for most tech stocks. The job reports released on Oct. 4 provided a much-anticipated relief rally for the markets. Yet the new week has seen the downtrend resume. Shareholders are now wondering what may be next for Facebook stock in the coming weeks.
Online interaction and communication patterns can possibly be defined as “before-Facebook” and “after-Facebook.” It is quite not possible to go back to an earlier mode of communication. And the long-term impact and success of Facebook stock are likely to stay for years to come.
Yet as another busy earnings season gets underway, I’d like to urge investors in FB stock to exercise caution in the short-run. Here is why…
Facebook Stock and Investor Expectations
When Facebook releases earnings at the end of October, Wall Street is likely to pay special attention to several metrics.
Digital advertising: In simplest terms, FB stock is an advertising giant. Facebook’s digital advertising business is the main revenue generator and the social network has a lucrative business model.
When Facebook released Q2 results in July, revenue came at $16.89 billion, an increase of 28% year-over-year. About 98% of FB stock’s top line comes from targeted advertising.
Daily active users: Another important number to watch is daily active users (DAU). In July, Facebook management said that the DAU number has now reached 1.59 billion, an increase of 8% year-over-year. In other words, FB stock’s most recent DAU number is approximately 20% of the global population. 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.
Ad impression growth: In Q2, the number of ad impressions served across the group’s services increased by 33%. Ads on Instagram stories and feed as well as Facebook’s newsfeed were the main drivers. Through data collected on its platforms, Facebook can allow for a specific target to be reached via focused demographics, interest and a number of other criteria. Rich and reliable data, of which FB has plenty, is at the center of digital advertising. On Oct. 30, investors are also likely to scrutinize this number.
On July 24, prior to the release of the quarterly results, FB stock closed at $204.66. The next day, Facebook share price saw a 52-week high of $208.66. Since then, FB stock has been declining and is now hovering at around $177.
Long-Term Tailwinds for Facebook Stock
Over the years, through organic growth, aggressive monetization, as well as acquisitions, Facebook has managed to become and maintain its position as the premier social networking site globally. And despite the fact that FB stock has been declining since July 24, year-to-date, the share price is up about 37%.
Facebook has a massive audience worldwide and advertisers know the value of targeted social media advertising to reach a definite set of users. It also has a formidable mobile user base.
In the most recent quarter, Facebook’s mobile advertising revenue represented approximately 94% of advertising revenue for the second quarter of 2019. It was up from approximately 91% of advertising revenue YoY.
Believers in FB stock highlight the fact that there are no real alternatives to the company in the social media space. Although other platforms such as Twitter (NYSE:TWTR) and Snap (NYSE:SNAP) offer a way to connect socially, they are not as popular or comprehensive as Facebook. Therefore advertisers are drawn to FB’s ecosystem. And for investors, FB stock has been a clear winner over time and in 2019.
In addition to a strong corporate story, Facebook also has a clean balance sheet with no debt. Thus FB stock remains a long-term growth play on a fundamental basis. Going forward, Facebook is likely to successfully leverage its network for further sales and earnings growth.
Short-Term Headwinds for Facebook Stock
Especially since the Cambridge Analytica scandal that hit the news wires in March 2018, FB shareholders have become no stranger to controversy. Investorplace.com readers may well remember that at the time FB management had revealed that Cambridge Analytica, a UK-based political data consultancy, had gained access to up to 87 million users, based mostly in the US.
What has since become clear is that Facebook is facing public scrutiny like never before. There has been a shift in the global political environment. More countries are calling for tougher regulation of the technology giants, including Facebook.
Recent research by Dina Srinivasan published in the Berkeley Business Law Journal details Facebook’s rise to monopolistic power and what may possibly be next for the company and the stock under US laws and regulations. Another article published in BU Today of Boston University discusses the developments that have led to the many calls to break up Big Tech.
Could 2020 become the year when U.S. lawmakers decide that Facebook has indeed abused its market position?
Analysts are also noting that FB stock’s rising costs have been pressuring margins lower over time. Recently Facebook reached a record-breaking $5 billion settlement with the FTC. Management said that due to this cost, FB stock’s Q2 earnings-per-share were significantly lower than anticipated. CFO Dave Wehner warned investors that revenue growth will decelerate going forward.
Thus FB stock’s profit margins have suffered, mostly due to the legal expenses and fines regarding the FTC privacy investigation. Now Facebook’s operating margin stands at about 27%. It was 44% in the same quarter a year earlier.
The Bottom Line on Facebook Stock
Since March 2018, the FB stock price has not really changed and is still around $180. So if you had been a buy-and-hold investor in Facebook stock, your FB portfolio would not have changed much at the end of the past 18 months.
As regulatory risks continue well into 2020, they might end up overshadowing any strong earnings results Facebook may have. In other words, the current price level may actually continue to act as resistance for FB stock unless these privacy issues are settled fully.
Therefore you may consider waiting on the sidelines if you do not currently have any positions open in Facebook shares. Alternatively, if you already own FB stock, you may either consider taking some money prior to the earnings release or hedging your position.
As for hedging strategies, covered calls or put spreads with Nov. 15 expiry could be appropriate. Straight put purchases in FB stock could be expensive due to heightened volatility. Any short-term decline in Facebook shares may offer better entry points for long-term investors.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.