Facebook is still riding high
To put it mildly, Facebook has experienced has a lot of ups and downs over the past year. Most notably, the security and privacy concerns which arose as a result of the Cambridge Analytica scandal, made this year a tough year the social media giant which attracted a lot of press and political arena attention.
The company had to work around the clock to improve its privacy and security processes and has been fighting allegations that it has been used to interfere in the electoral process favouring the victory of Donald Trump in 2016.
Facebook like Google have been the subject of increasing scrutiny and several anti-trust and taxation. probes are currently taking place at the federal level and in the 50 States in the Usa but also in most of the European Union and countries such as India and Australia.
Yet, despite these controversies, most people believe that Facebook’s power within the social media space would allow this scandal to be nothing more than a hiccup with no real impact on the company’s success.
Indeed, despite a roller coaster ride since February 2018, the very moment where we called THE END OF TECH and recommended to short the company, the stock has been falling and rising again to challenge its all time high once again over the summer of 2019.
Today, we come with a renewed recommendation to short the stock for several technical and fundamental reasons.
SELL FACEBOOK INC. FB US @ US$ 177
As the weekly chart above shows, Facebook shares started falling in February 2018, peaked in July 2018, lost 37 % of their value between July and December 2018, made a new attempt above 200 in July 2019 and have finally recorded a very clear long term DOUBLE TOP and a short term HEAD AND SHOULDER.
Both figures are negative and although the stock is testing its moving averages, they point to a test of US$ 150 as a first step, while the potential upside is extremely limited by the multiple tops recorded over the past 18 months.
Investors are getting tired as in effect, anyone having invested in Facebook shares are still at the same level they were at almost two years ago at the beginning of 2017 while their portfolio experienced massive volatility.
Contrary to what was an established and steady rise over most of the secular bull market since 2013, the share price behaviour since 2018 indicates a major long term and complex top.
Looking at the SHORT TERM Daily chart, Facebook shares are in a descending channel with a succession of lower highs and lower lows which points to a treat of 160 first, but then as can be seen at the left of the chart the large gap produced by the q4 2108 earnings surprise has not been filled yet and points again to a target of US $ 150 before this phase is over.
Interestingly enough, contrary to what happened in January 2019 with the 2018 Q4 earnings, the 2019 Q! and Q 2 earnings led to disappointment and significant declines in the month following the announcement despite better than expected results.
Facebook is due to report its Q3 2019 results on October 30th 2019
Looking at the LONG TERM Monthly chart, the end of the bull stretch from 2012 to 2018 is clearly marked by a massive double top and either the stock is in a horizontal consolidation in which case, in all likelihood it will re-test the 128 level reached in December 2018 ( 38 % retracement ) once again or it has started a Bear Market , in which case the most probable end target before the bear phase is over is US$ 86, the 61,8 % Fibonnacci retracement of the entire bull phase.
From where we stand, this represent a 51 % fall.
In other words, from a technical standpoint, everything indicates that investors shaped sell of be short Facebook rather than long.
There are many reasons to worry about the future of Facebook Inc and in particular about its ability to generate the kind of revenues and earnings growth that has made it a US $ 500 Bln. market capitalisation company.
Erosion of clients
According to a study conducted by Pew Research Center, it’s time to reconsider the toll the recent events have taken on the Company, but some facts and figures first.
Around seven-in-ten U.S. adults (69%) use Facebook, according to the latest survey conducted in May 2019. That is s unchanged since April 2016, showing that there is a saturation of the US market where there is no growth anymore.
With the exception of YouTube – the video-sharing platform used by 73% of adults – no other major social media platform comes close to Facebook in terms of usage.
Around four-in-ten U.S. adults (37%) say they use Instagram, which also belongs to Facebook, but most users are common users of both, some being active and some inactive.
Among U.S. adults who use Facebook, around three-quarters (74%) visit the site at least once a day, according to the 2019 survey. The share of adult Facebook users who visit the site at least once a day is higher than the shares of Instagram users (63%) and Snapchat users (61%) who visit those sites at least daily
Adults are more likely to use Facebook than others. Three-quarters of women in the U.S. use the platform, compared with 63% of men. There are differences by education level : Around three-quarters (74%) of adults with a college degree or more use Facebook, compared with 61% of those who have a high school diploma or less.
Around eight-in-ten (79%) of those ages 18 to 29 use Facebook – much higher than the share among those 65 and older (46%). However, the share of older Americans who use the platform has more than doubled since August 2012, when just 20% of those 65 and older said they used it
Facebook no longer dominates the teen social media landscape as it once did. 51% of those ages 13 to 17 say they use the platform, down from 71% in a 2014-2015 survey.
Lower-income teens are more likely than higher-income teens to use Facebook. Seven-in-ten teens living in households earning less than $30,000 a year say they use the platform, compared with 36% of those whose annual family income is $75,000 or more.
The negative impact of the recent privacy issues
Many Facebook users have begun to rethink their relationship with the social media.
A little over half of adult Facebook users in the U.S. (54%) have adjusted their privacy settings in the past 12 months, according to a separate Center survey. The survey followed revelations that former consulting firm Cambridge Analytica had collected data on tens of millions of Facebook users without their knowledge or permission.
About four-in-ten adult Facebook users (42%) have taken a break from checking the platform for several weeks or more.
About a quarter (26%) have deleted the app from their phone at some point in the past year and 44-percent of younger users in the United States have deleted the app off of their phone entirely, a software company’s worst nightmare in the mobile-friendly world we live in.
Combined, 74% of adult Facebook users say they have taken at least one of these three actions.
These are huge numbers as they mean that Facebook has lost more than 25 % of its clients in the US in one single year, while almost half of its users have stopped using it for several weeks or more.
In terms of audience and advertising it reveals a trend that can be extremely damaging.
From the findings gathered by Pew Research Center, it’s clear users of all ages were put off by the way Facebook handled their personal data. With just over half of all Facebook users in the US having adjusted their privacy settings in the past year, most including younger users, it’s clear just how much users value their privacy today.
Another significant issue is Facebook’s problem with gaining traction popularity among younger generations that goes far beyond privacy.
The app, by its very nature, is less appealing to younger users because when a platform has your parents, aunts, uncles, grandparents actively using it, it becomes a repellant for engagement for younger users. This leads to them either not posting on Facebook at all, flocking to other apps where they can be themselves, or deleting their profiles altogether. This is one of the biggest reasons platforms like Snapchat have spread like wildfire across this age group.
Erosion of the Business model
If one thing can be taken away from these surveys is that Facebook monetising capabilities through advertising are going to be affected.
Advertisers are now diverting advertising budgets away from Facebook and towards other platforms, Instagram for the younger but Google, Linkedin or You Tube for others.
With the cost of Facebook ads increasing year after year, coupled with many users limiting their time on the platform, other apps provide fresh opportunities for their brand to be seen.
More worrying, the absence of independent verifiable impact is leading advertisers and the regulators to scrutinise the advertising algorithms of Facebook and Google. Complaints of advertisers being charged while targeting accounts of dead users or outside of the scope of the targeted market, or without any possible verification that the right audience is being targeted are being voiced and some countries such as Australia have already forced Google and Facebook to make their algorithms public.
The day where an independent institute capable of monitoring and certifying Facebook’s and Google advertising impact are not that far, but the consequences on the bottom line will be significant.
Erosion of the P/L model
Facebook and Google, like all fangs are now starting to feel the pinch of taxation, not only in the US abut also in most countries in which they operate and the trend is clearly towers the imposition of a sales tax on their services abroad.
Obviously, for companies that have been used to grow endlessly with no taxations consideration either in the US or elsewhere, this is going to be a game changer.
Last month Google had to settle a EUR 1 Billion fine with the French tax man to avoid criminal charges for tax evasion. In doing so, they have in effect recognised the validity of the principle of a local taxation of their services.
Even the giants can fall
We are living in the age of technological disruption.
Just a decade ago, Yahoo was still considered “cool”, MySpace was still kicking and Netflix was largely known only for delivering DVDs to your house in an envelope.
The marketplace moves at breakneck speed. New companies quickly become the old, even those as massive as Facebook.
As daunting and dramatic as it sounds, one wrong move, whether that be a misguided Tweet or insensitive Facebook post, could have huge consequences.
In our first papers where we predicted the END OF TECH in February 2018, we highlighted the fact that the main danger facing the FAANGS was their sizes.
By becoming supranational businesses reaching and collecting the personal data of Billions of individual across borders, the FAANGS have become a threat to Nations and their sovereignty.
Facebook, Google, Instagram and else have gathered much more information about the world population than any secret service and at much lower costs.
As such they must be BROKEN DOWN.
It is not an accident if the 2020 leading presidential candidate Elizabeth Warren is calling for their dismantling, as is one of the founder of Facebook by the way, and it is not an accident if LIBRA, the great digital currency put together by Facebook is seeing so much negative reactions from the powers.
WE DO NOT EXCLUDE THE FACT THAT COMPANIES LIKE FACEBOOK MAY HAVE DISAPPEARED IN 10 YEARS TIME
Valuation and Earnings
Facebook is due to report is earnings on October 30th 2019 and they are expected to come out stable when compared to the 2nd quarter and barely up 8.6 % year on year over the same quarter of 2018.
Does it really make sense to pay 20 x earnings a company whose earnings only grows at 7.7 % per annum ?
There is not much to write home about there and any disappointment will be severely punished.
Our worry is much more on the elevated 5.78 times Price to Book Value.