MorningWord 11/1/13: Facebook shares had a fairly volatile 24 hours. If the swings were in some lesser web 2.0 or perceived social networking stock like YELP or GRPN, I would most definitely not be writing about it. But this is a stock that went from gaining to shedding then re-gaining, what was no joke, $10 billion in market cap within a few trading hours.
Traders got whipsawed to say the least and in some ways for those true believers in the Facebook story the price action might have actually been fairly constructive, shaking out some of the weaker hands who were just in the trade for the earnings event hoping for an outsized moved similar to the one back in July.
From a purely technical standpoint, the stock did what it needed to on both sides of the coin. Looking at the range of the last few weeks it is fairly clear that $55 should serve as near term resistance. While $45, the previous low from last week’s NFLX inspired mini “flash-crash” serves as fairly decent near term support. The 30 day chart below shows the $56 all time high made in the aftermarket on Wednesday and the mini panic low at $46.50 yesterday morning, with a close almost in the middle of the range:
On a bit of a longer term basis, the stock held and important support level at about $50, and more importantly held the uptrend channel that has been in place since FB’s Q2 print in July. This is a fairly crucial level in the near term.
Aside from the technical set up, which is still touch and go at the moment, the fundamentals appear to be very strong. The company is successfully navigating a transition from the desktop to mobile, and in doing so, it is inserting ads that are supposedly effective and helping the company monetize the fast growing mobile user base. What I find most interesting about the volatility since Wednesday night’s print is that the stock sold off primarily on anecdotal comments from management about user engagement within the teen segment, despite overall active users and usage increasing sequentially. This is so interesting to me because there is no metric or dollar amount that you can put on the social relevance of a service like Facebook for the purposes of trading the stock. The coolest days FB has ahead of itself is overseas in the emerging world, not North America and Europe, where the service is fairly well saturated and many of the younger users will reject the social network that their dorky parents are on. Facebook won’t see the same fate as Myspace, it just won’t be the hot thing in the U.S. in 3-5 years for the kids. Think AOL or Yahoo!
The other point that created volatility was a comment regarding the amount of ads that the company is placing in users’ news feeds. Management acknowledged that ads represent about 5% of the posts in news feeds, which is essentially flat sequentially as the company walks a very fine line between figuring out what the appropriate amount of ads (ad $s) vs the potential to irritate the crap out of the customers with too many ads.
The 2 aforementioned factors plus the company’s inclination to spend on new initiatives (thus lowering operating margins, which were better than expected in the qtr, demonstrating leverage) will be closely monitored in the coming quarters,
While sentiment drove the stock down from the IPO day highs ($44) to the high teens, and then back through the IPO level to make new highs, don’t think it can’t happen again…just not yet. This story has some legs, and I supposed that as we get into the first half of 2014 and analysts and investors are starting to value the company on 2nd half 2014 estimates, the company will then start running up against some very healthy year over year comparisons from a growth perspective. The inability to maintain high growth in mobile adds coupled with the fear of losing the “cool” factor could be the future cause for investors to take pause. For now though, investors are more likely to push the Like button.