Big institutional investors are telling us which of the advertising platforms has the winning strategy to drive returns. Listen to the market if you want to make money.

Facebook monetizes the Facebook, WhatsApp, Messenger, Watch and Instagram platforms through the number of advertisement impressions (views) and click throughs which lead to demand fulfillment. The Company has been under pressure since November as governments question the value of social media and investors express concerns over initiatives which decrease advertisement viewership.

INVESTMENT THESIS

The Investment Thesis focuses on three areas in an evolution to how users interact with the platforms

1. Quality Time vs Quantity of Time – If users care about something, they are more willing to view ads to experience it. Shifting from showing people the most ‘meaningful content’ resulting in the consumption of passive content, to encouraging the most ‘meaningful interaction’ between people builds and develops relationships. This shift has already resulted in a reduction in the Quantity of Time by 50 million hours per day (2 minutes per person) but it’s expected the amount of Quality Time interacting will go up which provides stronger monetization opportunities.
2. Value Optimization for Business – Facebook is investing to drive better outcomes for advertisers for a given dollar spent, not the impression price, through better targeting and ad units which drives better conversion to purchases and leads to a willingness to grow advertising budgets with Facebook. This ultimately leads to an increase in yield per ‘impression’.
3. Interaction Initiatives – Facebook has won the contracts for the UEFA Champions League Soccer and College Basketball targeting sports as a community builder. E- Commerce is a strong growth initiative. Machine learning and AI (Artificial Intelligence) is the largest industry trend which allows for the optimization of everything users see, VR (Virtual Reality) and AR (Augmented Reality) are going to allow Facebook to develop completely new platforms and products.

4Q 2017 EARNINGS

Facebook beats the Street from CNBC.

On the January 29 Earnings Report for 2017 Facebook reported the following metrics
4th Quarter results year over year

• 2.1B monthly active users (up 14%) and 1.4B daily active users (up 14%).
• Average revenue per user $6.18 worldwide and $26.76 US & Canada
• total revenue $13B up 44%
• total ad revenue $12.8B up 48%, mobile ad revenue $11.4B up 57%
• average price per ad increased 43%. Number of impressions increased 4%.
• Total expenses $5.6B up 32%
• 25000 employees up 47%
• 57% profit margin
• Net profit of $4.3B or an Earnings Per Share of $1.44 which was reduced by $0.77/share as a result of a one time $2.3B charge related to US tax reform.
  Full year 2017
• Free cash flow $17B
• End of year cash and investments $42B
• $2B worth of share repurchases, $4B remains in allocation for future repurchases
• Revenue $40B up 47% over 2016

2018 anticipated full year tax rate in the mid teens compared to a 2017 effective tax rate of 43%.

TECHNICAL ANALYSIS

Facebook has been in an upward trending channel established by higher highs and higher lows since September.

The stock met resistance at about $180 starting in November which lasted about 10 weeks on concerns of abuse on the platform, including interference from nation states, the spread of news that was false, sensational and polarizing and debate about the utility of social media and the effects on advertising revenue.

Feb 1, the stock had a breakout above a ‘Technical Resistance’ level of $188 as a result of the 4Q 2017 earnings report which assuaged investors concerns on managements ability to execute a growth strategy given the challenges of social media.

Feb 2, the stock pulled back to test $188, which becomes the new ‘technical support’ level, on comparatively light volume which reflects there was not a lot of selling pressure on a day where the Dow Jones Industrial Average declined 665 points. This reflects an underlying strength in the stock and commitment from investors.

Money Flow – money flows like water, it never disappears, it simply changes direction. There is positive money flow into Facebook even though money has flowed out of a number of stocks in the market as a whole.

MACD – the black line is in a positive upward trend. If there is further weakness in the market as a whole, this trend could reverse and if the black line dips below the red line that would be a short term sell signal.

From the present price, the stock may either continue to climb to new highs, or if the market continues to sell off as a whole, the downward risk is a price decline to an important intersection of three ‘technical support’ indicators at roughly $182, which corresponds to the 50 day moving average (blue line), the base line (green) of the upward trending channel, and the previously established ‘technical resistance/support’ (black line).

What does all that mean at moneywiseHQ

At moneywiseHQ we don’t care how Mark Zuckerberg and Co make money, as long as they have a strategy to make money, and the ability to execute on that strategy. Every advertisement you see, every advertisement you click on and every advertisement you make a purchase on, Facebook makes money, with a 2017 global average of $20.21 per person and $84.41 per person in the US and Canada.

The technical analysis indicates an underlying strength and a low risk entry point of $182 which might be reached in a broader market selloff. The strongest stocks are always the last to pullback and the first stocks to recover. A good trader has to be aggressive to make money, but if you don’t have a defensive strategy you won’t keep your money. For new purchases a stop loss sell price of about $187 could be considered with a view towards buying back the stock at the $182 level.

Facebook is evolving to new user trends with a focus on personal interaction to generate viewership, value optimization for advertisers to maximize yield, and initiatives to develop new products to attract new users and participation. Big institutional investors are telling us which of the advertising platforms has the winning strategy to drive returns. Listen to the market if you want to make money.