2018 did bring a lot of controversy to Facebook, with many people being concerned the company may be going the wrong way financially. No one is wondering this today.
An old investing adage tells us to buy on the rumors and sell on the news. This advice isn’t all that great, although it is still often used by some investors looking to rationalize differences between fundamental business performance and stock performance, which can indeed deviate.
Where Facebook stock is concerned, a lot of people have gotten out of it recently based upon what we could call rumors, although these things may be better described as fears, and Facebook has had plenty of this in 2018.
These worries ranged from Facebook having serious security issues to people leaving for this and other reasons, and if you just listened to these rumors, you might think that 2018 may not have been such a good year for the site, but you would be completely wrong.
It would have made more sense in this case to do the opposite of the advice, to sell on the rumor and buy on the news, and that’s actually what the market as a whole has done.
We have some more news now, and some pretty impressive news at that, especially if you had concerns that the company may not have been doing so great lately. CEO Mark Zuckerberg has been at the forefront of the battle, with the apologies that he has made about the security issues that the company has faced lately, and how much more the company is spending on all this now, increasing his security staff from 10,000 to a whopping 30,000.
30,000 people just working on security costs a lot of money, and this part concerned people, as well as users moving away from the site to do their social media stuff elsewhere, particularly with so many people moving to Instagram as their main social media site, one which has gained a lot of popularity recently.
It’s the Bottom Line That Matters
The question that we really need to be focusing on is how Facebook’s business is doing, and everything else beyond this is really just a sideshow. If they are spending too much in security, this will show up in their bottom line, as well as any mass migration that may be happening with their users.
Facebook is well diversified in the social media business, and among their holdings is Instagram, which they acquired 7 years ago. If people are moving there, this doesn’t hurt the company because they just make the money from these users on a different platform, and better target these migrants as well.
People generally tend to have several social media accounts, and if you own several of them, especially big ones like Facebook and Instagram, this also serves to reduce the risk of one of them taking a hit. Facebook’s own userbase hasn’t really grown in North America lately, but it hasn’t declined either, and they are expanding in other markets. This is not scary news at all.
When we hear stories such as data breaches or Facebook paying users $20 to voluntarily share all their data from their phones with them, that may not be ideal for the company’s image, but if you’re still making a lot of money and especially if you are making even more money while this is all going on, you get to laugh all the way to the bank.
There was much of this laughter going on during Facebook’s earnings report on Wednesday, announcing record revenue and profits which are both up over a third. That sure doesn’t sound like a company in trouble and quite the opposite in fact, and things at Facebook have never been so good.
2018 brought Facebook record revenues of $36 billion, up 37% from 2017, and record profits of $22 billion, up 39% over the previous year. For the quarter, profits come in at $7 billion, telling us that about a third of its profits for the year came during the last quarter, meaning that we have real momentum here instead of starting strong and levelling off or declining.
The Future Looks Bright as Well
The expectation is that this party will continue on into 2019, and with all this great news, the market responded by raising Facebook’s stock price 11.5% in after-hours trading. A move like this tells us that this is being seen as all very positive for the company and its stock, where people are buying on the news and buying a lot.
When we look at the charts, we see that Facebook’s stock lost about $50 a share in 2018, or 27%, during this record year that blew away all previous results. Now that we know for sure that 2018 was really that good, people will be eager to get away from the rumors more and start valuing the company more in line with the facts, the news, the actual numbers and not some guesses or ones based upon worry.
We’ve gained back $13 a share since the beginning of 2019, and we are primed for more, and maybe a lot more. Perhaps Facebook was overvalued when it traded over $200 for a time last July, but when we look at the company’s business results, it does appear that it is now quite oversold.
How the market is moving does matter to such things, and we can see divergences when the market is pulling back but a company’s profits remain strong, we have both working for us now, with both the market and Facebook trending up.
There may be little to stop this stock from a big move upward, and the strong move we’re seeing since the news was announced may only be the start of things. While there are several larger companies, Apple for one, that might look longingly at the peaks of their stocks just a few months ago and wonder what it might take to get back there, there may be some very good reasons why this may be too much to hope for anytime soon.
With Facebook, we don’t have to really wonder about much. Getting back to their July 2018 peak, their all- time high, and even possibly surpassing this by a good margin is very much on the table now.