FB with Nobias technology: Can Embattled Facebook Shares Overcome Recent Headline Risks?
Facebook (FB), which has recently been rebranded Meta (and will soon trade with the MVRS ticker symbol, starting December 1st, 2021) has been all over the financial news headlines in recent weeks.
For several years now, Facebook has been front and center with regard to regulatory talks going on in the United States, as well as other countries across the world, who are concerned about the power of the big-tech stocks, especially when it comes to censorship, propaganda, false information, and election integrity issues.
In recent years, Facebook has also been targeted for anti-competitive behavior and potential antitrust regulation because of its recent acquisitions of Instagram and WhatsApp, which has allowed this company to dominate its peers in the social media space.
Most recently, when rival Snapchat (SNAP) posted poor earnings on October 21st, which disappointed and led to the company’s shares falling roughly 25%, there were fears that the issues that SNAP experienced with regard to the new iOS privacy settings would cause industry wide issues in the social media space now that it is more difficult for them to collect data and sell targeted advertisements within Apple’s (AAPL) digital ecosystem.
Last week headlines also broke with regard to ongoing leakes, now referred to as “The Facebook Files” which shed a negative light on the inner workings of this company, its priorities, and ultimately, add to the regulatory spotlight and pressure that Facebook was already under.
And most recently, we arrive at Facebook’s recent earnings report and the announcement that its founder and CEO, Mark Zuckerberg made, with regard to Facebook’s transition to Meta, which will be focused on growth in the metaverse, as opposed to being an ad-driven social media company (the metaverse idea is very interesting - almost something from science fiction - and yet, it appears that modern technology has the potential to make it a reality; here is the video that Zuckerberg posted highlighting the potential of the metaverse and explaining why Facebook will be pursuing leadership in that burgeoning industry).
Needless to say, there is a lot to sort through when performing due diligence on FB shares. With all of this going on, Facebook shares are down 15.8% from their 52-week highs. And therefore, we wanted to take a look at what the credible analysts tracked by the Nobias algorithm have had to say about these headlines recently to see whether or not this is a dip that investors should consider buying.
During his video, Zuckerberg highlighted the fact that building out the metaverse will require immense capital spending and therefore, the company plans to be more transparent about the financial performance of its Realty Labs segment moving forward.
Nicholas Rossolillo, a Nobias 5-star rated analyst, recently published an article which highlights these ambitions. Rossolillo said, “Starting in the fourth quarter of 2021 (which the company will report in January 2022), Facebook will add a new line item for FRL [which stands for Facebook Realty Labs] results and disclose the massive investments the company is making. This will separate Facebook's virtual reality operations from the advertising empire, which will now be called "Family of Apps" and include Facebook, Instagram, Messenger, WhatsApp, and other services.” He continued, explaining that “The Oculus (AR/VR) business is the core of FRL. It includes hardware like Oculus Rift, designed to be used with a VR-ready PC; Oculus Quest, a stand-alone unit that delivers virtual worlds without the need for a separate computer; and mobile AR/VR headsets designed for use with a smartphone, like the now-discontinued Samsung Gear VR powered by Oculus.”
Facebook management is making it clear to investors that their investments in the metaverse and virtual reality assets are long-term investments which aren’t likely to pay off in the near future. The company mentioned that its FRL investments will reduce operating profits by approximately $10 billion in 2021. However, the company believes that the short-term risks here are worth the potential long-term rewards.
Rossolillo wrote, “Zuckerberg and company said FRL won't be profitable anytime soon. Nevertheless, they think the metaverse will become the successor to the mobile internet one day. Therefore, they are focused on getting the right products in place to get people and businesses introduced to the whole idea. Facebook thinks it can get 1 billion people using VR by the end of the decade, at which time it could generate many billions of dollars in annual revenue.”
Rossolillo appears to be bullish on Facebook’s metaverse potential; however, it's important to note that at this point in time, the ultimate size, scale, and Facebook’s eventual market share of metaverse related revenues (because this isn’t the only technology company working on developing a virtual reality future) are speculative.
It appears that this concept has tremendous growth potential, but it’s difficult for analysts to bake metaverse related sales, earnings, and cash flows into Facebook’s current valuation. The metaverse concept is certainly exciting, for the company and for the world at large; however, it’s also important to focus on the success of the company in the here-and-now and therefore, let’s take a look at what Nobias 5-star rated analyst, Jill Goldsmith, recently had to say about the company’s Q3 report.
Facebook reported its third quarter results on October 25th and Goldsmith covered them in an article on Yahoo Finance. Facebook beat Wall Street’s consensus estimate on the bottom-line, posting earnings-per-share of $3.22, which was $0.04 higher than the Street’s expectations. However, Facebook missed forecasts on the top-line and this disappointing revenue result has factored into the stock’s recent weakness. Even though Facebook missed estimates, Goldsmith highlighted the strong double digit growth that the company produced, saying that the company generated “Revenue of $29 billion for the September quarter was up 35% from the year before but below Wall Street estimates.” She continued, writing that the company produced “Earnings per share of $3.22 — up 19% — were a beat.”
With regard to its user base, Goldsmith points out that “Facebook hit 2.91 billion monthly active users last quarter, up 6% from the year earlier”. She continued, pointing out that “DAUs [daily average users] were 1.93 billion on average, also an increase of 6% year-over-year.” It turns out that the top-line results weren’t the only disappointing figures that the Q3 report included.
Goldsmith said, “It [Facebook] expects fourth-quarter revenue to be in a range of $31.5 billion to $34 billion — below forecasts.” She quoted a company statement provided during the Q3 report which read: “Our outlook reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple’s iOS 14 changes, and macroeconomic and COVID-related factors. In addition, we expect non-ads revenue to be down year-over-year in the fourth quarter as we lap the strong launch of Quest 2 during last year’s holiday shopping season.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Lastly, Goldsmith highlighted the recent “Facebook Files” saying, “The social media giant has been engulfed in a storm of bad press jumpstarted by a whistleblower and a series of recent WSJ exposes called The Facebook Files — followed by a thrashing in other leading publications for its dangerous impact on young people, public discourse, politics and more.” She pointed out that whistleblower, Frances Haugen, was questioned by Congress several weeks ago and highlighted her belief that the company is failing to self-monitor its platforms and prohibit the negative impacts that it has on society.
Goldsmith said, “The nub of multiple reports is how FB’s own internal data showed harm. Haugen says it is absolutely within the company’s ability to take steps to address problems it but has repeatedly put use engagement and profit over the public good.” She also reports that “files” continue to leak and therefore, there is potential further downside ahead for this social media name.
However, when looking at the collective opinion on FB shares within the Nobias universe of highly credible authors, the strong bullish lean makes it clear that the analysts we track are happy to look past short-term issues and focus on the company’s long-term potential. Right now, 89% of the credible authors that we track express “Bullish” opinions on FB shares. And, the average price target on FB shares amongst the Wall Street analysis which receive 4 and 5-star ratings from the Nobias algorithm is currently $433.85. Today, FB shares trade for $323.57. Therefore, the average price target above points towards upside potential of approximately 34%.
Disclosure: Of the stocks discussed in this article, Nicholas Ward is long AAPL and FB. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.