Facebook, Inc. (FB) is trading higher by nearly 2% in Thursday’s pre-market after beating fourth quarter 2020 top- and bottom-line estimates. The social media giant earned $3.88 per share in the quarter, $0.64 better than expectations, while revenue rose 33.2% year over year to $28.1 billion, higher than the $26.4 billion consensus. CEO Mark Zuckerberg reaffirmed 2021 expense and capital expenditure (capex) projections while expecting revenue to “remain stable or modestly accelerate sequentially in Q1 and Q2.”
- Facebook beat fourth quarter earnings and revenue estimates.
- Political headwinds are finally dissipating, allowing fundamentals to control price action.
- Two-sided price action is likely into March, but the stock could break out later this year.
Daily Active Users (DAUs) rose 11% year over year to 1.84 billion, while Monthly Active Users (MAUs) grew 12% to 2.80 billion. The company just authorized an additional $25 billion in share buybacks, adding a tailwind at the same time that political headwinds are receding following the transition to the Biden administration. The company also said that it will no longer recommend civic or political groups and is working to reduce the amount of political content.
The push to repeal Section 230 liability protections for social media lost steam when Donald Trump left office, still reeling from Facebook and Twitter, Inc. (TWTR) bans that cut off his main sources of communication to followers. Democrats are unlikely to press for reforms given those actions, setting the stage for a period in which ad revenues guide price action rather than threats or intimidation. In turn, this could clear the pathway to new highs.
Wall Street consensus on Facebook stock held firm through the election and violent aftermath, with a “Buy” rating based upon 39 “Buy,” 3 “Overweight,” 6 “Hold,” and 1 “Sell” recommendation. Price targets currently range from a low of $205 to a Street-high $397, while the stock is set to open Thursday’s session around $70 below the median $345 target. This humble placement adds another tailwind that raises the odds for sustained upside.
Capital expenditures (capex) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. Capex is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof, purchasing a piece of equipment, or building a new factory. This type of financial outlay is made by companies to increase the scope or add some economic benefit to their operations.
Facebook Weekly Chart (2012 – 2021)
The stock came public in the low $40s in 2012 and entered an uptrend 14 months later, stalling in the low $70s in March 2014. Price action then eased into a narrow rising channel and traded within those boundaries into July 2018, when it topped out at $219 and broke channel support, dropping to a two-year low. A slow-motion uptick returned to the prior high in January 2020, yielding a quick rally, followed by a failed breakout and 87-point decline into March.
A strong recovery wave reached the first quarter peak in May, setting off an immediate breakout, but momentum didn’t kick in until August, when the stock took off in a vertical impulse that posted an all-time high at $304.67 a few weeks later. Price action since that time has eased into a bearish descending triangle that suggests much lower prices, but that will change if the stock can rally above resistance at $290.
The weekly stochastic oscillator has entered a buy cycle that predicts relative strength into March, but the monthly oscillator remains in an active sell cycle, with the conflict likely to generate two-sided price action. That makes sense, with price embedded around the midpoint of the five-month trading range. Despite the conflict, it looks like the stars are slowly aligning for a breakout that rewards patient shareholders.
A descending triangle is a bearish chart pattern used in technical analysis that is created by drawing one trendline that connects a series of lower highs and a second horizontal trendline that connects a series of lows. Oftentimes, traders watch for a move below the lower support trendline because it suggests that the downward momentum is building and a breakdown is imminent. Once the breakdown occurs, traders enter into short positions and aggressively help push the price of the asset even lower.
The Bottom Line
Facebook has added a few points after posting exceptionally strong fourth quarter profits and revenue.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.