Facebook less is more message belatedly liked by Wall Street

Delayed reaction

Facebook’s earnings look better to investors during the day than at night. Thursday trading brought a delayed positive reaction to a quarterly report meriting the term ‘blockbuster’, aside from marginally disappointing user growth. Shares rose 4% at the time of writing, pivoting from an ‘after-hours’ slide the night before. The numbers showed FB’s latest double-digit quarterly revenue vault—up 47% to $12.97bn. If not for a dent from charges linked to tax reform, earnings per share would have been $2.21, compared to The Street’s $1.95 expectation.

Socially responsible network

Initial disappointment centred on user engagement—combined with Facebook’s cautionary statements on the cost of being more socially responsible. Daily Active User growth rose 14% to 1.4 billion, nearer to half of the UN’s 2015 estimate of total global Internet users. Proximity to that midpoint has been the source of market speculation that it might represent a serviceable limit for daily engagement. DAU missed forecasts by a fraction, also suggestive of a stall. Furthermore, North American user growth fell for the first time in Facebook’s history. Overall use fell by 50 million hours a day, the group said.

Overload

Investors had been primed for bad news for months. CEO Zuckerberg has warned repeatedly that fixing security “will significantly impact profitability going forward”. Similarly, Facebook alerted investors several quarters ago that ad load—the density of ads users will accept before leaving—was almost critical. Stagnant user metrics threatened to combine with a rare erosion of Facebook investor sentiment over the last year. 

Care to watch more

Instead, during its conference call, Facebook rowed back the idea that less time spent on Facebook was an absolute negative.

Mark Zuckerberg: “When you care about something, you're willing to see ads to experience it. But if you just come across a viral video then you're more likely to skip over it if you see an ad. So I want to be clear, the most important driver of our business has never been time spent by its self. It's the quality of the conversations and connection. And that's why I believe this focus on meaningful social interactions is the right one.”

Indeed it was notable that U.S. and Canada DAU falls coincided with average price per ad rising 43 percent in Q4. Sophisticated ad targeting tools that Facebook arms advertisers with should in fact deliver better return-on-investment not worse, if users are more engaged.

Thoughts on Facebook’s price chart

Having set a new record high at $195 on Thursday, the stock was about a dollar lower at the time of writing. With 21-day exponential moving average pointing higher in the four-hour chart and confirmed support at $185.55 though (it held into Wednesday night’s main market close) the stock continues to look underpinned. The market has attempted to respect rising trend line supports on the longer-term rising trend and one supporting lows back to January 2017 with mostly clean results. (Neither trend is fully depicted in the chart below). Additionally, momentum studies like the Relative strength index suggested overbought conditions were possible but not yet realised. By and large our best guess remains that Facebook prices are likelier to attack the upside than the downside over the near term.