Facebook tests investor tolerance of costs shares test support

‘After-hours’ trading in Facebook shares gave a thumbs-down to its earnings released last night, and the main concern among investors is a surge in spending […]

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By :  ,  Financial Analyst

‘After-hours’ trading in Facebook shares gave a thumbs-down to its earnings released last night, and the main concern among investors is a surge in spending at the social media giant.

Facebook’s final quarterly earnings were very respectable.

Its $0.54 earnings per share, adjusted for one-off items and other ‘noise’ beat the consensus forecast of adjusted EPS which was $0.49.

The ‘noisy’ EPS number (which is actually the one Facebook is obliged to provide in order to abide by accounting rules) was bang in line with the Street‘s forecast—25 cents.

But what the market truly blanched at was that total costs and expenses rocketed by 87% in the quarter to $2.72bn.

Narrowed down to just R&D spending, the cash outflow more than doubled to $1.1bn from $408m year-on-year.

Throw in a hefty 15 percentage point haircut on operating margins (which fell to 29% from 44%) and there’s little doubt that getting more wary on FB’s bottom line makes sense.

The shares had a nice run up into the earnings during Wednesday’s session, closing with a 1% rise, though that had been trimmed from being more than 5% up in earlier trading.

But there was no mistaking investor reaction to the numbers by looking at the after-hours market—there, the shares fell 2.5%.




Facebook stand at ‘Ad Tech’ conference in London, September 2010

Can Facebook’s advertising boom pacify investors?

All this despite the fact that total earnings rose 34% to $701m on a 49% boom in revenues to $3.58bn.

Facebook also raked in more advertising sales against its ‘collateral’ of active users—revenue per active user advanced 31% to $2.81. And if we look at its biggest market, the US and Canada, the revenue growth rate was even faster, up 49% to $9 per active user.

If we examine that ‘collateral’ more closely, further reasons to curb enthusiasm become evident.

For one thing, daily active user (DAU) growth has slowed down to a standstill. The first time Facebook has reported no DAU growth since its IPO about two years ago. DAUs grew just 3% in the quarter before.

If we look at the less exacting engagement measure, monthly active users, (MAU) these figures were also steady at 1.39 billion and 1.19 on mobile.



Spending up, user growth less so

So user growth is becoming a lot more modest. Plus, in the regions where user growth was the biggest (in Asia Pacific and the rest of the world) revenue per user was the lowest—just $1.27 in APAC and everywhere else on average just 94 cents.

Asia-Pacific daily users rose by 11 million whilst everywhere else combined, including North America, added 7 million.

At the same time, Facebook CEO Mark Zuckerberg and other top execs have been warning for months that FB is not going to flinch from humongous spending.

And so it came to pass in last night’s results, as mentioned above.



Facebook will spend more, spend often, spend fancy

In the conference call last night, Zuckerberg & Co. came across as nothing short of adamant about spending.

The underlying message was that investors should brace themselves for FB to keep pumping big chunks of its sizeable capital base into costly R&D projects, aiming to create the next-level user experiences that will put FB ahead of the curve.

The company is stressing that it’s more concerned about the longer term than the short-term regarding expenditure levels.

It is thinking in terms of three, five and 10-years ahead.

For instance, within ten years, at most, it expects to be the leader in virtual reality user experiences, with its VR Occulus business, bought last year.

Such ventures aren’t cheap though—R&D expenses rose to 29% of revenue from 16% the year before.

Facebook’s Chief Financial Officer Dave Wehner last night laid out the relentless spending planned on infrastructure alone, for 2015.

“We will be investing in data centers, our network and servers to grow our existing services and support newer initiatives such as video and our global connectivity efforts through Internet.org. We anticipate our 2015 CapEx will be in the neighborhood of $2.7 billion to $3.2 billion”.

Neither would there be any slowdown in hiring, after the 45% headcount increase in Q4: “we will continue to invest in and grow the talent base throughout the year”, Wehner said, concluding that FB was “focused on continuing to execute on the business and investing in our long-term mission and success.”



Monetisation may just be getting started

Against investor concerns about spending in the near term, Facebook would probably counter with the following basic arguments:

  • Facebook is second only to Google in mobile advertising: according to market researcher firm eMarketer Facebook last year held 18.4% of the $40 billion mobile ad market, up from 16.6% in 2013. Google’s share, by contrast, dipped to 40.5%, from 46.6%.
  • Facebook said 85% of users used mobile devices, with more than a third accessing the network exclusively via mobile. Advertisers like that. Facebook said 69% of its $3.6bn in advertising revenue came on mobile devices, up from 53% of advertising revenue in Q4 year-earlier period
  • FB hasn’t even started to do much advertising yet on WhatsApp, Instagram or Messenger
  • We are also leaving out revenue from ads on apps installed in FB. Game developers have complained there aren’t enough ad slots to satisfy the demand. FB has only just started to scratch the surface of in-app ad demand with its Facebook Audience Network
  • Overall revenue per user growth is clearly promising–it jumped 31% on a rise of just 13% in monthly users (even if the regional breakdown presents issues)
  • If daily user growth mentioned above can be sparked up again, profit per user can grow from $2.81


So overall, FB continues to try to strike a balance with its investors.

It will keep pushing their level of tolerance for eye-watering spending sprees, while at the same time, continuing to point out ways that past spending has been vindicated (e.g. that $1bn on Instagram, which is now judged by several US investment banks to be worth more than $30bn).


Shares unfriend the trend

So how tolerant are Facebook investors feeling right now?

In a wide-angle view of the stock’s daily chart, it’s getting difficult to maintain the view that the shares are in an uptrend, without ‘moving the goal’ posts, as it were.

In theory, there ought to be some support at the upcoming $72 pivot, though the balance of momentum has switched in the last few days, marginally below the zero lines on MACD and its cousin, the percentage price oscillator.






On the half-hourly view, the hints that price could be losing important moving averages is realised, even though the stock closed in the black. And upside momentum may be struggling here too. At the very least I expect some follow through selling, to match the after-hours fall.

Still I’m not too negative on the overall picture for the trading day and I have marked a number points when the stock has respected a nearby pivot on a half-hourly basis on the upside and downside.





For traders of City Index’s Facebook Daily Funded Trade, I had a warning last night about what looked like increasing volatility.

In fact though, the attached Volatility Quality Index indicator, whilst elevated, shows jumpiness in the trade (and perhaps traders) slackened off into last night’s close.





Another attached trading system, based on the MACD concept, gives out buy and sell signals by following the ‘zero-cross’ principle to the letter. As can be seen, there’s a reminder on the chart above to never use one system in isolation, because the trade fell after a ‘long’ signal was triggered around 6PM.

Even so, the MACD Fast Line/Zero Cross System’s rate of successfully predicting direction looks better on a wider perspective.




The chief concern for short-term buyers of the underlying stock, which may feed through to the DFT, is that half-hourly sentiment looks like it favours a weaker price for the near term.











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