Social media giant Facebook (FB:Nasdaq) is looking for a strong year after revealing their first quarter earnings earlier this year. The company, which also owns and operates Instagram and WhatsApp, as well as the virtual reality company Oculus, is poised to increase its revenues across the board after a series of announcements regarding its divisions which include increasing their future earnings potential. News of Facebook’s impending plans to further monetize Instagram, the photo-sharing social network, the upcoming release of Oculus’ Rift device, and their plans for WhatsApp are big signs the company is ready to make a big splash after several quarters of disappointments and growing fears that the valuation is unjustified.
The Fundamental Picture
So far in 2015, Facebook has seen a strong performance. Social networks’ efficiency and ability to generate revenues is derived from their user-base, coupled with their ability to continuously acquire and monetize new users. Despite already having close to 1.5 billion users worldwide, Facebook has shown an extraordinary ability to continue growing. In the first quarter they gained 46 million new daily active users, and 48 million monthly active users. Overall, the company showed a 24% expansion in mobile monthly users and a 31% growth in daily mobile users on an annualized basis. These numbers are significant because they expand on Facebook’s ability to generate advertising revenues, their main source of income. These numbers only reflect facebook.com, and don’t account for either WhatsApp (which already has 800 million monthly active users) or Instagram (with 300 million). Although they are proceeding cautiously in monetizing WhatsApp, the company is ready to fully monetize their Instagram platform, and they are projecting upwards of $1 billion in revenues by 2017.
The company has also recently made announcements that place it at the forefront of emerging markets in developing countries. They recently announced Facebook lite, a version of their mobile app designed to operate optimally without overloading user bandwidth, to be used in places with spotty infrastructure, or little internet availability. They have also been a part of Internet.org, a program aimed to deliver internet connectivity to developing countries with lacking infrastructure. These two initiatives ensure that Facebook will see continued growth into new markets. In terms of advertising and monetization, the company also has recently begun moving into the emerging (and profitable) video-ad market, and is perfectly poised to gain a lion’s share of the market. Users watched four billion videos per day in the previous quarter, up from three billion in the fourth quarter of 2014. Rumors have already placed a price tag between $1 million and $3 million per day for a 24-hour video advertising slot on facebook.com.
In financial terms, Facebook is still a strong performer, and looks to continue that trend. Despite showing a contraction in their revenues compared to fourth quarter numbers (approximately 8%) Facebook performed admirably, seeing revenues climb 41% year over year. The firm reported earnings per share of $0.42, beating expectations by $0.02 but which was viewed as a mild disappointment. The company has not been without its own share of controversy and it is worth noting that Facebook is currently seeing a strong pushback in European markets after several governments have begun investigations into how Facebook collects and uses customers’ data. However, there is cause for cautious optimism in the coming quarters, as the company is set to open more revenue streams with the full monetization of WhatsApp, as well as with the market release of the Oculus Rift, the company’s Virtual Reality device. A full pipeline means new channels of revenue and monetization potential in spite of concerns that the company potentially overpaid on earlier acquisitions.
The Technical Take
On the whole, the technicals are supportive of further upside in share prices despite the extraordinary high valuation for Facebook shares which boast a price-to-earnings multiple (TTM) of 80.11 according to the latest closing price, well above levels for the S&P 500 and Nasdaq Composite. While it has strongly outperformed key benchmarks year-to-date, there is potential for a pullback in shares based on the existing indicators and biases. On a longer-term basis, the shares have been trending higher over time, supported in part by the golden cross technical pattern formed in 2013 which is a shorter 50-day moving average crossing the 200-day moving average to the upside. At this point, shares are trading above both moving averages in another bullish sign for the shares.
Click on picture to enlarge
Looking at the last year, Facebook stock has been trending higher in an equidistant channel formation which also has a strongly bullish bias. However, prices are rapidly approaching the 50-day moving average and are trading in the middle of the channel meaning that long positions initiated from this entry are not ideal. Long positions below $80.48 substantially improves risk reward in this scenario with the target on the upside at all-time record highs of $86.07. Resistance sits before the level at $83.49 and if new revenue streams are as profitable as expected, could pave the way towards $90 per share and higher. Should prices fall below support at $79.23 it could be indicative of a potential channel-based breakout that is accompanied by increased downward momentum towards $76.49 and $73.47. The case for cautious optimism remains as traders await the unfolding of the technical pattern for further hints.
Click on picture to enlarge
Conclusion
Facebook is one of the most highly value stocks in a challenging earnings environment for global multinationals and social media shares. In spite of the headwinds, the company has showed very strong user growth on the new acquisition and active monthly user basis which should provide strong tailwinds for performance. The rolling out of several new products should also contribute to improvement on the top and bottom lines. However, it will be predicated on Facebook’s ability to monetize the new revenue channels successfully while fighting off negative publicity from data collection methods. While the technical perspective has a strongly bullish bias, any break of key support levels could pave the way lower, beckoning cautious optimism towards the valuation. At this point in time though, a run back towards all-time highs at $86.07 seems likely as future prospects improve.
Comments
Log in or sign up to join the conversation.