Facebook investor stand-off likely to be short-lived

Facebook’s third quarter was nothing short of a blockbuster, but the shares fell.

From blockbuster to tiny pop

Facebook’s third quarter was nothing short of a blockbuster, but the stock’s immediate reaction overnight was uncharacteristically noncommittal and shares actually traded lower on Thursday at the time of writing. A lack of the near-customary ebullience that is normally seen from Facebook’s investors was even more telling, because third quarter advertising revenues alone were $10.14bn, way above the $9.84bn figure most analysts were expecting to see from all FB businesses. EPS was $1.59 against Wall St’s consensus for $1.29.

View from the Hill

It is the prospect of a swift and forced end to Facebook’s relentlessly spendthrift approach to growth by means of huge R&D, higher headcount and other expenses that has irked investors. In the face of pressure on Capitol Hill, the group has made clear that efforts to prevent further widespread misuse of the social network would come at a cost. Criticism of the group in Washington may also have played a part in dragging its stock off the latest in a string of record peaks. Ultimately, sentiment may be turning as the potential for increased regulation and scrutiny of FB’s many monopoly-like advantages comes into view.

Support

Nevertheless, we would view the current stock price retreat as contained so long as it remains above key supports seen over the last four months. Foremost, we would look to $175.5, former resistance in early July and last month. Below, that, mid-September support $163 would be in focus, ahead of the validated trend line stemming from January. Only if $156.5, resistance in late June and early July, were to be breached, would FB bulls be concerned. That support is close 38.2% of the move from November 2016 to recent highs underlining the prospect of heightened volatility if it were to give way. Such an occurrence is not our base case though. Bargain buying flows seem likelier to be seen around $175.5.

Figure 1- Facebook Inc. Share price chart (daily intervals)

Source: Thomson Reuters and City Index

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