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Facebook Earnings: Whistle-blowers and Outages out, Metaverse in

Changes are afoot before Facebook earnings are reported on Monday October 25th after the close on Wall Street. Will Q3 results and the Metaverse rebrand enable investors to look past recent difficulties?

What’s happening at Facebook?

A whistle-blower interview on the US TV show 60-minutes coupled with an hours-long outage of all social media services meant Facebook has been in the news for all the wrong reasons over the past few weeks. The result was a 17% drawdown in the stock price with five successive weekly declines. But things are starting to turnaround.

With the bad news in the rear-view mirror, anticipation for bumper quarterly earnings and a first-ever major rebrand from Facebook to ‘Metaverse’, investor sentiment has flipped positive. FB shares snapped their weekly losing streak, and more gains could be on the horizon if Q3 results live up to lofty expectations.

The Facebook stock price

A general pullback in large cap technology stocks coupled with some high profile issues specific to Facebook saw the FB stock price tumble over 17% from a record high posted in September.

In the last week, amid a big corporate re-branding and before the release of Q3 earnings, Facebook shares have popped.

 

facebook chart

 

The chart above shows Facebook shares found support from a rising trendline connecting the lows from March 2020 and March 2021. The bounce happened before key support form the $300 round number and $295, a previous level of resistance.

The implied volatility on Facebook options, which describes how much options traders believe the price will move, is elevated at 36.75%, slightly above the 12-month average. This level means that options traders expect choppy market conditions and a move of at least 2.3% per day.

Whistle-blower & outage

On October 4, the price of Facebook stock tumbled over 4% in response to a whistle blower interview with on the news program 60 Minutes, as well as an outage that led to all Facebook services going down. The fear among investors was that both could do permanent reputational damage to Facebook.

 

 

Frances Haugen, a former employee argued that at her time at Facebook she witnessed "conflicts of interest between what was good for the public and what was good for Facebook."

The outage led to Facebook.com, WhatsApp and Instagram going dark for 6 hours. Facebook later explained that it was caused by “configuration changes on the backbone routers that coordinate network traffic between our data centres”.

The Metaverse

Arguably Facebook shares the view that its reputation needed some management, perhaps explaining the recently-announce rebrand to ‘Metaverse’.

What is the Metaverse? CEO Mark Zuckerberg describes it as the following:

"You can think about the metaverse as an embodied internet,

where instead of just viewing content — you are in it."

You can read more about this in our blog: Facebook’s ‘’metaverse’’—a fool’s errand, or masterplan?

The Metaverse looks to be part of Zuckerberg’s long term vision to incorporate and monetize its massive $2 billion acquisition of Oculus VR in 2014 into Facebook services.

FB earnings forecasts

Earnings:

The company is expected to earn $3.17 per share, according to data collated by Yahoo Finance. 90-days ago, the list of 39-analysts that cover Facebook stock estimated that the company would earn $2.94 per share, demonstrating an upwards trend.

 

FB earnings forecasts

Revenues:

Facebook is forecast to produces sales of $29.53 billion. The high estimate among analysts at Zacks is $30.81 billion and the low estimate is $27.2 billion. These forecasts imply 17% growth in the current quarter with forecasts for 13.6% growth next year.

Valuation:

Facebook stock trades at 18x forward earnings.

Big Tech

Facebook is not the only big tech company reporting results over the next week. Other parts of the acronyms FAANG and/or FANGMAN are also on the agenda.

Monday 25th - Facebook

Tuesday 26th - Microsoft and Alphabet

Thursday 28th - Apple and Amazon

Tech stocks are mostly higher in 2021 alongside broader stock markets but the performance has been a mixed bag. The share prices of big tech companies rose so rapidly off the lows in 2020 that 2021 has been more of a ‘breather’ for most. 

Buy the dip?

The decline in Facebook shares has provided investors with an opportunity to buy one of the world's biggest companies at a discount. The price is currently trading near $340 per share, and the average analyst price target price is 20% higher at $408 according to MarketBeat.com.

If this is the end of the correction in Facebook stock, it’s not the first time Facebook has flirted with controversy and come out fine the other side. The Cambridge Analytica scandal embroiled the company for months in 2016. Investors eventually looked through the noise, instead focusing on Facebook’s dominant position in social media and online advertising that has produced stellar earnings growth, especially for such a large company.

The risk to further gains in Facebook stocks are perhaps outside the control of Facebook. Some of the expected growth in huge tech companies like Facebook over the next few years from the digitalisation of the economy - was brought forward into 2020/21.

The investing landscape that has made these stocks so dominant in portfolios over the past decade is also potentially changing. Facebook and its ilk have been rewarded with high valuations while interested rates have been kept artificially low by central banks, including the Fed. Now inflation has reappeared and this period of low interest rates is coming to and end, possibly alongside the dominance of these firms.

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