Facebook (FB) Sells Off Despite Blowout Q3 Report

Facebook, Inc. (FB) is trading lower by nearly 5% on Friday, despite beating third quarter top- and bottom-line estimates by wide margins. The social media giant reported a profit of $2.71 per share while revenue rose an impressive 21.6% year over year, underpinned by the pandemic and historic interest in the 2020 presidential election. Monthly average users (MAUs) surged 12% year over year, providing a large basket of new eyeballs for advertisers.

Key Takeaways

  • Facebook reported blowout third quarter profits and revenue.
  • Political headwinds and strong 2020 returns have set off an aggressive sell-the-news reaction.
  • The decline could reach intermediate support in the $230s.

The company expects MAUs in the United States and Canada to be flat or lower in the fourth quarter but projects year-over-year revenue growth to be higher than in the third quarter due to strong holiday season demand. However, expenses are also likely to increase due to product development and the acquisition of technical talent. Ad revenue growth is expected to ease in 2021 due to a return of normalcy after the pandemic runs its course.

CEO Mark Zuckerberg said little about his ongoing confrontation with the Republican-controlled Senate or the push by FCC Chair Ajit Patel to regulate social media platforms through Section 230. The regulation currently provides vast immunity, but Patel is committed to a reinterpretation that allows the conservative wing to file anti-bias lawsuits against Facebook, Twitter, Inc. (TWTR), and other venues considered hostile to their positions.

Facebook's political controversies haven't affected Wall Street's wildly bullish stance, with a consensus "Strong Buy" rating based upon 33 "Buy," 3 "Hold," and just 1 "Sell" recommendation. Price targets currently range from a low of $195 to a Street-high $350, while the stock opened Friday's session about $40 below the median $312 target. Political headwinds are affecting this humble placement, with potential fallout from the presidential election still on the table.

Monthly active users (MAU) is a key performance indicator (KPI) used by social networking and other companies to count the number of unique users who visit a site within the past month. Websites generally recognize monthly active users via an identification number, email address, or username.

Facebook Daily Chart (2018 – 2020)

Chart showing the share price performance of Facebook, Inc. (FB)

A multi-year uptrend lifted above $218 in July 2018 and ended overnight when the Cambridge Analytica scandal privacy scandal broke, dropping the stock more than 41 points in a single session. Aggressive sellers maintained control into December, posting a two-year low in the $120s, ahead of a multi-legged recovery effort that completed a round trip into the prior high in January 2020. It popped briefly to a new high and reversed, failing the breakout in a pandemic decline that finally ended within 14 points of the prior low in March.

A steady uptick completed a 100% retracement into the first quarter high in May, yielding a breakout and holding pattern that tested new support for more than two months. The stock finally ejected higher in late July, posting an all-time high at $304.67 in August and rolling over in an intermediate correction that has established support at the 50-day exponential moving average (EMA) near $265. Price action is testing that level on Friday, with a breakdown favoring a quick trip into the $240s.

Intermediate support lies at the unfilled July 31 gap between $235 and $247, while the lower end is narrowly aligned with the 200-day EMA. Even so, it will be hard for bears to take control of the long-term tape unless they can engineer a high-volume failure of the May breakout in the $220s. That doesn't seem likely unless a second Trump administration gets more aggressive in taking control of social media platforms.

A correction is a decline of 10% or more in the price of a security from its most recent peak. Corrections can happen to individual assets, like an individual stock or bond, or to an index measuring a group of assets. An asset, index, or market may fall into a correction either briefly or for sustained periods – days, weeks, months, or even longer.

The Bottom Line

Facebook stock is selling off despite blowout third quarter profits and revenue, with mixed sentiment into the presidential election weighing on investment decisions.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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