Facebook: Bullish Testimony, Stock Turning Point
Facebook (NASDAQ:FB): Buy Rating
I wanted to review my thoughts following Mark Zuckerberg's testimony to Congress. Many of these thoughts we brought up in chat to subscribers but I wanted to get my thoughts out more officially and to anybody not on chat.
I came away bullish from the testimony to Congress. Mr. Zuckerberg was very well prepared and responded very well to what Congress hoped would nail him. They did not which makes them look bad. There were also periods of lightheartedness on both sides meaning the tone of the questioning was much more bullish than could have been expected.
Many of the members of Congress were begging Mr. Zuckerberg for support of their own individual causes which tells me he's probably more in the clear.
As you know I also wanted to see how the stock 'acts' on bad news and I have mentioned these big climax events could be turning points. The stock was up into his speaking and went up more after he spoke and the next day. I think that's a very good sign.
The negatives out there will continue to be negative news-flow through to November elections. But hopefully the worst of the shock value of the news is behind us and the stock can act on earnings and fundamentals which I am still very bullish.
Slightly Higher Expenses
The positives are our earnings numbers, if correct, are still blow out despite their plans to up expenses 45-60% in 2018 that they stated in November and again in the recent earnings report.
Mr. Zuckerberg did say something to the effect that they will have more than 20,000 people by year end dealing with security. Facebook said on November's earnings call,
"We already have about 10,000 people working on safety and security, and we're planning to double that to 20,000 in the next year to better enforce our community standards and review ads."
That tells me we are generally on track with the 45-60% expense growth they talked about. "More than" is a tick up but I think they are having trouble getting there as Q4 expenses were below their expectations despite announcing it halfway in their Q4.
I have total expenses building through the year Q1 +41%, Q2 +46%, Q3 +48%, Q4 +51%. Our model is in their expense growth range but mid-low end. I think it's too hard to get there. Mr. Zuckerberg did have one brief comment after talking about the 20,000 people that the ramp is challenging which could have been referring to the entire initiative or AI.
Nonetheless the expense ramp is huge but their high margin business model multiplied by the revenue growth more than offsets that. Their business model is too strong based on the math.
Low Chance Of Hurtful Regulation
As for regulation, I don't expect hurtful regulation. Hurtful regulation will hurt the many businesses benefiting from Facebook ads. Plus with President Trump being pro business and a beneficiary of Facebook ads (thus these hearings today) I see hurtful regulation a very low probability this year or as long as President Trump is in office.
That said, the lead up into November's elections will continue to flow negative news against Facebook. That's why this news climax today seeing positive stock action is bullish despite the coming expected further negative news flow to come.
Less Impact On The Business Than Expected
Lastly Mr. Zuckerberg said "there was not" any meaningful user drop off based on recent news. Recently Mr. Zuckerberg said there was no "meaningful impact" to advertisers despite COO Sheryl Sandberg said there were a few advertisers "paused spending."
In combination I think there's a smaller amount that could impact revenues but probably not to the degree of bearishness or earnings risk that investors fear.
With the stock down into earnings I think that, like other stocks that we like, can be bought closer to earnings. The markets are rocky. The tech news flow is rocky. That makes it reasonable to lean closer to earnings. But so far, the tech earnings are mostly strong. Facebook is one of them. So ex newsflow and market volatility the underlying earnings fundamentals, I think are still very strong for Facebook.
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