Facebook earnings: Navigating risks - Stock Market News



The world’s leading social media titan will report earnings on Monday after Wall Street’s closing bell. Facebook shares have retreated lately amid a barrage of negative headlines, from a whistleblower testifying before Congress to fears that digital advertising growth will slow. Things could get worse in the near term, but valuation remains attractive and the company’s prospects are quite bright as it leads the way into virtual reality.

Rebranding

Facebook is no stranger to bad publicity. It has faced several scandals but every time it escaped without any serious injuries, consistently growing its active users and profits. Reflecting this, its shares have suffered sharp drawdowns at times as investors focused on regulatory risks, only to bounce back with force thanks to improving fundamentals. 

The stock seems to be going through one of those phases right now. A whistleblower recently published thousands of documents and testified before Congress, alleging that Facebook prioritized ‘growth over safety’ and buried internal research showing Instagram is harmful for the mental health of teenagers. Perhaps in an attempt to do some damage control for its reputation, Facebook just announced it will change its company name. 

But the real issue is growth in advertising spending, which is the company’s bread and butter. That may have slowed, partly because of tougher year-over-year comparisons now that the depressed pandemic prints drop out of the yearly equation and partly because of some pain from Apple. 

Apple changed its settings to allow iOS users to decide whether they want apps to track them for advertising purposes. This means that if Facebook users on Apple devices don’t accept to be tracked because of the company’s reputation, that would reduce the effectiveness of targeted advertisements. Ultimately, businesses that relied solely on Facebook for marketing could diversify and shift some of their ad spending to competing platforms like TikTok or Twitter. 

Stalling growth

For the third quarter, the tech juggernaut is expected to report earnings per share of $3.19, which would represent a 33% increase from the same quarter last year. Similarly, revenue is projected to have risen 38% over the same period to reach $29.6 billion. 

These numbers seem great when compared to last year, but not so impressive when compared to the previous quarter. Revenue is essentially flat from Q2, while earnings per share are actually lower. That suggests growth has stalled lately. 

Facebook has a strong history of beating earnings estimates, having done so in all four of the preceding quarters, and in seven of the last eight. 

Outlook and valuation

Overall, even if Facebook struggles for a while, it’s difficult to argue with its longer-term prospects. Almost half the world’s population is using the company’s platforms, which include Instagram and WhatsApp. When your reach is so wide and your audience so massive, it’s relatively easy to improve profits. 

The other ingredient that could turbocharge growth is virtual and augmented reality, a field where Facebook is leading. CEO Mark Zuckerberg is trying to transform his company into a ‘metaverse’, where instead of viewing content on your screen, people use VR headsets to feel like they are in it. The VR/AR industry could be massive, revolutionizing several other fields like gaming. 

On top of everything, the company’s valuation is quite attractive. The 12-month forward price to earnings ratio currently stands at 21.7x, which is just a little higher than the overall S&P 500 and far lower than other tech giants. In fact, once you exclude the mountain of cash sitting on the company’s balance sheet, the valuation becomes even more appealing. 

This ‘underpricing’ probably reflects the various risks, like US regulators coming after the company for its monopoly powers lately. While this is unlikely to lead to a forced break-up as Facebook would go on a lobbying war to prevent that, it’s still a tail risk.

All told, there are several elements clouding the outlook for now, from a potential slowdown in advertising to negative publicity. But time and again, Facebook has come out from similar crises unscathed and grown even stronger. Buying a high-growth tech stock at a reasonable valuation can work wonders for long-term investors, even if there is more turbulence in the short term. 

Taking a technical look at Facebook shares, an earnings beat could propel the market higher towards the 350 barrier, with another break opening the door towards 373. 

On the downside, a potential violation below the 338 zone would turn the focus to the 323 region. 

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