If you own Facebook Inc. (NasdaqGS:FB) stock, you’re probably nervous – if not scared – after the huge tumble it just took.
If you’re Mark Zuckerberg, your net worth just fell by more than $17 billion. That’s a big ouch, no matter how rich you still are.
But, if you’ve been looking to buy into Facebook, you’re being handed a good opportunity.
So today, I’ll let you know the skinny on what brought the stock down.
We’ll go over what the company’s facing in the near future.
And I’ll show you why now is the perfect moment to make a fat profit on the stock’s rebound…
What Took Everyone by Surprise
Contrary to what you’ve been hearing in the media, Facebook’s earnings weren’t bad. In fact, some of the numbers were good.
As in really good.
Take a look…
- Daily active users (DAUs) – DAUs were 1.47 billion on average for June, an increase of 11% year-over-year.
- Monthly active users (MAUs) – MAUs were 2.23 billion as of June 30, an increase of 11% year-over-year.
- Mobile advertising revenue – Mobile advertising revenue represented approximately 91% of advertising revenue for the second quarter of 2018, up from approximately 87% of advertising revenue in the second quarter of 2017.
- Capital expenditures – CapEx for the second quarter of 2018 was $3.46 billion.
- Cash and cash equivalents and marketable securities – These were $42.31 billion at the end of the second quarter of 2018.
Net income for the quarter rose 31.6% to $5.12 billion.
Sales, meaning all ad revenue, were up 41.9%.
User engagement in the United States and Canada was flat, but was down to 279 million in Europe from 282 million in the year-ago quarter.
Still, Facebook 2.23 billion monthly users. Think about that.
That’s a lot of “customers.”
What shook up analysts in the actual earnings numbers was the expense line.
Facebook’s operating expenses were $7.4 billion – up 50% year-over-year and up 13% sequentially.
As far as personnel, the head count at FB was up a whopping 47% to 30,275. That was considerably more than what anybody had been expecting.
But, what really took everyone by surprise and caused the massive selloff was what CFO David Wehner said on the earnings call.
He said, “Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4.”
And as if that wasn’t mind-blowing enough, Wehner went on to say, “Looking beyond 2018, we anticipate that total expense growth will exceed revenue growth in 2019.”
Now you get why the stock fell off a cliff.
What You Can Do Now
Was what Wehner said so bad?
I don’t think so.
Total expense growth – including head-count growth, which Facebook’s been saying they’re going to load up on to address privacy and data issues – as a percentage of current expenses and personnel, could exceed revenue growth.
That sounds bad – but so what?
That’s not going to happen forever. It’s about adding personnel to manage data issues Facebook has been under scrutiny for. They must add there to handle what they’ll eventually manage through algorithms and better technology features within the company.
Just because revenue growth is expected to grow slower than expenses isn’t the death knell for Zuckerberg and Co.
Yes, there will be pressure on margins. In the quarter, margins fell to 44% from the previous year’s 47%. But, personnel and operating expenditures aren’t going to eat into profits to where there is profit growth.
That’s the bottom line.
Sure, Facebook’s got some headwinds.
The European Union isn’t done investigating the company and could end up levying a huge fine on the company. U.S. regulators are looking at Facebook, too. For instance, the Federal Trade Commission could hit them with a huge fine.
But, with more than $42 billion in cash, and more being generated every day, fines won’t be a problem.
What We Need to See
If fines are minor or nonexistent, the stock will take off.
If revenue accelerates, the stock will take off.
If margins stay above 40%, the stock will take off.
If operating expenses come in less than “talked-up” in the future, the stock will take off.
In fact, the stock’s at a level right now where it’s a buy.
I’m buying the stock right here, down almost 20%.
No, I’m not loading up. I’m going to add to my position if the stock falls to $170, buy more if it drops to $160, and load up the truck if it gets to $150.
But, it may not drop much further than where it is now.
That’s why buying Facebook in this uncertain environment could certainly be a great move.
Sincerely,
Shah
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Source: Wall Street Insights & Indictments