Facebook newsfeed turns more positive

Summary

Has Facebook broken through to the better side of its worst year as a listed company?

Messy

Asked another way, in what could still be the stock’s first ever annual fall, does a strong bounce the day after mixed, though promising quarterly earnings herald the beginning of a sustained rebound after the loss of about 35% between late July and Tuesday’s close. Annoyingly, of course, there’s no way to answer that question definitively just yet. What is more certain is that the most optimistic narrative on the stock has survived the company’s weakest user growth ever in a messy year of scandal and declining sales.

Earnings wrong-foot, users, less so

For one thing, the group hasn’t lost a long-standing knack for wrong-footing earnings estimates. A solid net income beat of $5.14bn reaped earnings per share of at $1.76, some 28 cents higher than Wall Street’s expectations, even on revenue that missed. True, double think is evident. The stock both surged and fell in almost equal measure in post-earnings extended trading on Tuesday. It jumped around 7% on Wednesday before sliding to stand around 3.2% higher at the time of writing. After all, there was no quick fix for user growth. Predictably, European monthly active users fell (see GDPR) by 1 million, whilst U.S. users rose by the same amount. All told, it was the slowest rise in Facebook users in 6 years. Daily active users were also below forecast. But the real story for the group for years hasn’t been Facebook.com.

It's not about Facebook.com

Rather the clearest theme to find value hidden in plain sight is in the group’s portfolio of largely unmonetized apps, chiefly Instagram, WhatsApp and Messenger. There has been no clear break out of non-FB app data yet, but the group said users of at least one app rose to 2.6 billion during the quarter from 2.5 billion in Q2. Coupled with a forecast that fix-up costs that are compressing margins will abate by 2019, a way through the crisis for the buy case is visible. None of this solves Facebook’s reputational, governance and political challenges. But with a trailing price/earnings ratio down at just 20 times earnings from almost 60 times at end-October 2016, the stock is objectively more attractive even whilst headwinds remain.

Thoughts on Facebook’s technical analysis chart

Facebook stock price action on Wednesday represents double-think writ large. The shares were rapidly looking to close a large opening gap at last check, thereby giving back a large chunk of optimistic value. In doing so, the stock validated the resistant power of the 61.8% interval of its fall from its 17^th October failure high to a 20-month low at the start of this week. The wider backdrop is an appropriately messy falling channel (just about) validated since June and a confluence of recent daily highs and lows that amount to short-term resistance around $154. With the shares also well below the investor’s benchmark of a stock’s underlying health—it’s 200-day moving average--they're unlikely to make much progress in the foreseeable future without breaking above the structures mentioned above.