This is a Guest Post by Dr. Arnout ter Schure on Twitter @intell_invest.
Can Facebook Muster One More Rally?
Summary
- Immediate crises may keep near-term future uncertain.
- Its own crypto currency maybe ill-timed, but good for the long-term.
- FB still has growth potential (followers and add revenue).
- FB may need to trim and slim first though (top and bottom).
- Price charts hint at one last rally.
Facebook (FB) has seen a tumultuous past year. On July 25, 2018 price made a new All Time High (ATH), and the next day it had lost almost 20% on worse than expected earnings (future earnings primarily). The pain didn’t stop there as the company has been under severe scrutiny for mishandling of data following revelations that political consulting firm, Cambridge Analytica, had misused data of around 50 million Facebook users. Federal regulators and state prosecutors opened investigations into Facebook. Politicians in the U.S. and Europe called for its CEO Mark Zuckerberg to testify before them.
Thus, simply being one of the most innovative firms on Earth is no guarantee of never-ending success. Facebook has namely a broader accountability due to its size both in followers and as a large company with over 30,000 employees.
- Managing social impacts and social responsibilities.
- Assuring a well-performing company, staff and managers want to work for.
- By keeping work fun, relevant and thus the workforce productive.
Facebook can quickly check-mark the last two items as it has been THE place where many want to work. But Facebook has underestimated its social impacts and responsibilities in that space; and it is finally starting to catch up.
This issue will continue to be a drag on the company for some time to come, until it has resolved this issue satisfyingly with regulators, followers and the general public. As such it could keep investors lukewarm at best, and rightfully so. But the bright side is that there’s obviously room for a lot of follower and add-revenue growth when Zuckerberg has addressed this issue and can ascertain things are much better, safer, and unbiased.
That said, there’s of course the issue at the top on Zuckerberg’s role, as well as that of Sheryl Sandberg’s. Both appear to be opposites. This limping on two long-term goals (Mark: social focus, Sheryl: add-revenue focus) needs to be harmonized and streamlined or FB could face larger cracks than desired and see investors pull out even more. As such, a reshuffling of the cards at the top, and streamlining the workforce could be the real message investors want to hear; cut some off the excess fat that stifles innovation, slows down forward thinking, and drags on efficient problem solving.
But, to possibly diffuse the situation somewhat, FB announced its new digital currency, Libra, on June 18. With over 2.5 billion customers across its platform (Instagram, Messenger, and WhatsApp), Facebook has a huge user base, and there’s thus no need to convince people to sign up. They are already signed up and Libra will -hopefully- be seamlessly integrated into apps that are already a part of many peoples’ daily lives.
Now, crypto currencies are still at the early stages of integration into our society and its acceptance level among the general public is still stuck at “what is it, what can it do, why is it better, is it safe, and how do I get better from it?” and viewed as speculation not yet an investment. Thus, not until crypto currencies can move past this stage, will it also on Facebook’s platforms become widely accepted. That could take a while, and as such with crypto currencies here to stay -like it or not- Libra will most likely be a long-term shot and not an immediate patch to current issues that require a different problem-solving strategy.
Ultimately, I always think the answers to many questions and uncertainties are answered in part by the price charts as these convey investor mass-mentality about a company’s current- and its future status. When I look at the weekly chart of FB I see a price pattern emerging that suggest it could move to new ATHs ($255 and beyond) over the coming months, but in a choppy fashion.
This choppy fashion (called a diagonal in Elliott Wave terms) represents the underlying uncertainties that are currently playing out, while investors do know the long-term future of FB is bright and it is simply here to stay. Once this pattern has completed a much larger correction should emerge, which could be started by the necessary shake-up at the top (stock prices don’t fall when mid-level managers are fired, but can top when CEOs, CFOs are).
Overall, I think the future of FB is bright over the long-term (years+), with help of Libra and a more streamlined and social-responsible company, but current uncertainties may push prices higher in a choppy fashion as all these issues are dealt with and eventually digested.
Arnout ter Schure, Ph.D.
Founder and President Intelligent Investing, LLC