Investor’s Business Daily
FB stock got tripped up with other techs on the Pfizer coronavirus vaccine. But the FANG stock quickly found its footing and now has a new cup-with-handle buy point. Facebook’s business is on a major roll that neither Covid nor a high-profile boycott have been able to stop.
Strong third-quarter earnings suggest that Facebook (FB) also will be able to overcome the latest worry about a post-Covid slowdown. Still, the threat of antitrust action hasn’t gone away. So is now a good time to buy FB stock?
Facebook easily surpassed third-quarter earnings estimates, posting an adjusted profit of $2.40 per share, up 13% from a year ago, excluding a 31-cent tax benefit. Revenue grew 22% to $21.5 billion, topping $19.8 billion estimates and doubling Q2’s 11% growth rate.
Facebook stock initially traded lower after the late-day Oct. 29 earnings report. Investors appeared to focus on a slight decline in daily active users in the U.S. and Canada to 196 million from 198 million.
Facebook had previously warned that a spike in use of the social media app that occurred early in the pandemic would moderate as life normalized, and it began to over the summer. The trend of flat or slightly lower daily and monthly active users will likely continue in Q4, Facebook said. Yet, despite that headwind to growth, Facebook revenue actually accelerated through Q3.
In late July, management had said that Facebook revenue was growing about 10% from a year ago early in Q3, far below the 22% growth rate for the full quarter.
“We expect Q4 growth to be higher than the reported growth rate in Q3, because obviously we saw August and September being stronger,” CFO Dave Wehner told analysts.
It’s not clear how much Facebook revenue growth in July was held back by a high-profile ad boycott targeting its perceived tolerance of racially offensive speech, which management has since taken steps to address.
The bigger picture is that Facebook advertisers, a group which has grown to 10 million businesses, are using the social media site to connect with prospective customers like never before.
Q3’s 22% growth came as ad impressions served across Facebook properties grew 35% from a year ago, while the average price per ad decreased 9%. That latter figure was a big improvement over Q2, when the average purchase price through Facebook’s ad auctions fell 21%.
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FB Stock Analysis
After encountering moderate selling pressure following its Q3 report, FB stock surged along with other megacap techs on 2020 election results. Although Senate control will come down to two Georgia runoffs, the lack of a Democratic sweep will likely limit the scope of legislation to rein in Big Tech.
Even after this week’s selling on vaccine news, Facebook stock action looks constructive. Since hitting an all-time high of 304.67 on Aug. 26, FB stock has carved out an 11-week cup-with-handle base. The new Facebook stock buy point is 10 cents above the highest point on the handle, which is 297.38, according to a MarketSmith analysis.
However, the heavy selling in the start of the handle, followed by the muted recovery late last week, is not especially encouraging.
After a stellar first eight months of the year, FB stock’s performance has dimmed a bit recently. Facebook’s relative strength line, the blue line in the charts provided, has come off its highs since late August. The RS line indicates that FB stock, amid ups and downs, has basically matched the S&P 500’s performance since late May.
Still, Facebook stock has repeatedly found support near its 10-week or 50-day moving average, a reassuring technical indicator.
Facebook Business Developments
Facebook still has plenty of untapped potential that has Wall Street excited. In August, it began taking on TikTok with the newly launched Instagram Reels. And the long-term effort to monetize the massive WhatsApp user base is just getting started.
One key initiative announced early in 2019 has been the integration of Facebook and Messenger with Instagram and WhatsApp. That effort “to let people message across apps” is making strides, CEO Mark Zuckerberg said on the Q3 earnings calls.
“When a small business sets up a shop, they can now establish, or will be able to establish a commercial presence across Facebook, Instagram and WhatsApp all at the same time,” Zuckerberg said.
“Soon, you’ll also be able to click a WhatsApp icon on a Facebook Shop to chat directly with the business,” COO Sheryl Sandberg added.
Facebook announced 2021 capital spending of $21-23 billion, driven by investments in data centers, servers, network infrastructure, and office facilities. Some of the growth vs. an estimated $16 billion reflects delayed construction due to the pandemic. Still, RBC Capital Markets analyst Mark Mahaney wrote that the the implied 31%-44% increase shows Facebook is “investing aggressively in innovation from a position of strength.”
Release of the $300 Quest 2 virtual reality headset should provide a boost to Q4 revenue. “Pre-orders have outpaced the original Quest pre-orders by more than 5x and have surpassed our expectations,” Zuckerberg said.
Facebook has warned that ongoing privacy regulation and changes in mobile operating platforms, notably the Apple iOS 14, could impede ad targeting and weigh on ad pricing. However, Apple delayed the most important change until early next year.
Facebook Braces For Antitrust Action
The FTC signed off on Facebook’s Instagram merger, but reserved the right to review its decision later. Yet Facebook argues that undoing its 2012 Instagram or 2014 WhatsApp deals so long after the fact “would send a disquieting message to the business community.” The comment comes from an Oct. 4 Wall Street Journal report on the antitrust defense Facebook is preparing.
Bloomberg News reported on Oct. 23 that FTC staff supported an antitrust suit vs. Facebook. If backed by a majority of commissioners, a suit could reportedly come within weeks. However, it’s not yet clear how the shift in presidential administrations might affect the case.
FTC Chairman Joseph Simons has said that Facebook’s integration of its Messenger, WhatsApp and Instagram properties would complicate a breakup. Facebook’s defense makes the same point: The company would spend billions to maintain separate systems. Security and users’ experience would suffer.
If the FTC files an antitrust case, it could take years to litigate. However, FB stock might face near-term risk, if the FTC seeks an injunction to block further integration, impeding the company’s grand vision.
Numerous state attorneys general also are weighing antitrust action against Facebook. Meanwhile, the European Union is investigating whether Facebook wields user data to reward partners but cut off access to competitors.
The Justice Department filed an antitrust suit against a FANG stock peer, Google parent Alphabet (GOOGL), on Oct. 20. Yet Google stock has done just fine since then and is now trading in buy range.
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How Much Is FB Stock Worth?
Facebook stock has a market cap of $784 billion. That makes FB stock the fifth-most-valuable company on the S&P 500 index, behind Apple (AAPL), Microsoft, Google stock and Amazon stock.
FB Stock: Is It A Buy?
Wall Street analysts think this FANG stock still has a long growth runway and provides unmatched value to advertisers. Facebook has proved its mettle during an unprecedented economic downturn.
Facebook stock boasts an excellent 98 IBD Composite Rating. The Composite Rating combines several key fundamental and technical factors into a single score. IBD research shows all-time stock winners often have a Composite Rating of at least 95 near the start of big runs.
All that potential makes it crazy to bet against FB stock. Yet as antitrust threats circle Facebook, FB stock remains just below a buy point.
Bottom line: FB stock is not a buy. But Facebook stock is moving toward a buy point and is worth watching.
Yet Facebook also could be about to enter the uncharted waters of an antitrust case.