(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NFLX.)
Facebook Inc. (FB) and its CEO Mark Zuckerberg had a challenging 2018 mired in negative headlines on user privacy, congressional hearings, and rising cost - it was a year to forget. However, all cannot be forgotten, and now the company will present its fourth-quarter results on January 30 after the close of trading. Investors are likely to be laser-focused on the company’s revenue growth and bottom line.
Facebook’s valuation fell 40% in 2018, approximately $250 billion wiped out. Much of that was due to shrinking margins and lower earnings growth as the company spent billions to strengthen security measures to protect the privacy of its users. The result - a high-powered, revenue-generating, profit-making machine that is struggling to grow at all in 2019. Of the four stocks that make up the FANG acronym – which is short for Facebook, Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and Alphabet Inc. (GOOGL, GOOG), Facebook is expected to have the slowest earnings growth in 2019.
Analysts are forecasting earnings of $2.20 per share in the fourth quarter which would reflect no growth versus last year. Additionally, revenue is estimated to have grown by 26.5% in the quarter to $16.4 billion. Facebook’s management noted on the third-quarter conference call that it expects to see a negative impact on revenue in the fourth quarter potentially due to lower ad impressions and data privacy initiatives.
The bigger weight on the company is on the expense side. In the third quarter, the company noted that expenses rose 53% to $7.9 billion. Additionally, the company expects that full-year 2019 expenses will rise a stunning 40-50% versus 2018. Meanwhile, capital expenditures are projected to rise by as much as 45% in 2019 to $20 billion.
Problems Lie Ahead
There is a risk that Facebook gets hit on both sides of the income statement at some point soon. Facebook generated 99% of the $13.7 billion in total revenue in the third quarter from advertising. Of that, nearly 50% was generated from the U.S. and Canada. Additionally, the average revenue per user in the US and Canada is $27.61 - almost three times more than Europe at $8.82.
The problem for Facebook is figuring out how to continue to drive the revenue per user in the U.S. and Canada higher. That may be a challenge because the number of users in the U.S. and Canada has plateaued. Facebook will have to find new ways to increase revenue from other regions. However, the gap is wide. For example, Asia-Pacific revenue per user is only $2.67.
Options are Bullish
The options market appears to be betting on the stock rising following results. The long straddle options strategy for expiration on February 15 suggest the stock rises or falls 10% from the $145 strike price. It places the stock in a trading range of $136 to $163 by the middle of February. The bullish calls are outweighing the bearish puts by nearly 5 to 1, with roughly 16,000 open call contracts.
Technicals are Mixed
The chart is sending a mixed message at this point, with a stock sitting right at technical resistance around $149. Should the equity break out it could rise by 6.5% from its current price of around $148 to $158 in the short-term. Should resistance prove to be too strong, it could result in the stock dropping by roughly 5.5% to $140. However, the good news is that Facebook has broken free of a horrible long-term downtrend which has been in place since July.
Additionally, the relative strength index has been steadily rising, suggesting bullish momentum is moving back into the stock.
Facebook does not have an easy path to travel in 2019 as the company continues its efforts towards growing the top-line while investing billions back into the business. The stock price reflects the nervousness investors have surrounding the scenario. Where the company and the stock go will depend largely on how Facebook plans to proceed into the future.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.