Facebook shares will rise or fall on app sales spending

Facebook Inc. will take the baton from Apple tonight, with the second most closely watched earnings release of the week.

Server outages aside, Facebook remains the biggest social media network in the world, claiming 1.366 billion active users earlier this month, so market anticipation is on a similar scale to that seen for Apple’s results.

Now clearly, Apple set a bar which quite literally, no company is likely to match for years.

But lower expectations aside, will Facebook delight or disappoint?

Here’s what the market will look out for when Facebook’s fourth-quarter results are released after the US market close.

• Net income is seen at $0.25 per share, according to a consensus forecast compiled by Thomson Reuters. The figure excludes certain expenses and compares with $0.20 cents reported for Q4 a year ago
• Revenue is seen at $3.8bn versus $2.6bn a year earlier
• Apps: Facebook has a lot of them. The biggest are Instagram, WhatsApp and Messenger. The first two alone now have 300 million and 700 million users respectively. Because Facebook CEO Mark Zuckerberg has dropped strong hints that monetisation might begin when app users reach 1 billion, there’s a streak of anticipation that app revenue figures could be broken out for the first time
• Mobile Ads: Facebook built and launched a digital advertising network, specifically for mobile, last year. The network provides a streamlined way for Facebook-hosted ads to appear on other apps. FB also un-mothballed an old advertising server called Atlas.  Key risks include that online growth is unequivocally weighted to mobile (maybe forever). That means falling screen space for ads. On top of that, desktop ads are getting bigger, with the same effect. Expect an update.
• Spending: Zuckerberg said in October Facebook would spend “aggressively”, snapping up companies, investing in tech and in big hiring. CFO David Wehner also chimed in that expenses would rise. What with FB’s Occulus virtual reality specs purchase, and interest in such fancy areas as artificial intelligence and advanced wireless networks, R&D spiked 65% in Q3. Headcount ballooned by 49%. Will the market tolerate figures of such magnitude tonight?

Excitement or nerves?

Either way, Facebook shares are firm today, with a 2.2% gain as this article goes online.

There might be some sort of ‘hallow effect’ going on from last night’s Apple spectacular, but the market might also be showing increasing confidence in its FB forecasts.

The shares are up 45% in 52 weeks, though only a net 2% higher in the last 3 months; suggesting caution has been the watchword among FB investors since its last quarterly results.

Looking at the closing half hour of last night, and the opening half hour this morning in City Index’s Facebook Daily Funded Trade, we see the Apple effect there too.

Whilst the attached MACD Fast Line/Zero Cross System correctly signalled net gains today, another indicator I have attached suggests traders would be wise to show increased caution as FB’s results draw near.

The Volatility Quality Index, which also utilises moving average principles, currently shows a steepening ascent in the very short-term red MA line (9 periods).

This line is catching up with the VQI itself (green) which inverted earlier.

The 200-period MA of the VQI is shown in yellow.

Clearly, risk that the DFT could move sharply over the short-term in either direction is increasing right now.