Facebook Is Now An Aging Growth Story
Summary
- Facebook's stock may come under considerable pressure as costs spiral higher.
- Options traders are betting shares fall.
- The technical chart also points to negative trends.
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Facebook's (FB) stock likely isn't finished falling yet. Expenses are soaring and 2020 will be no better. Couple that with decelerating revenue growth, and it is likely to pressure operating margins and earnings growth in the future. Currently, analyst consensus estimates are calling for another year of lackluster earnings growth, pushing the prospects of better growth out to 2021.
Based on that future earnings growth, one could argue that Facebook's stock is no bargain trading at roughly 19.2 times 2021 earnings estimates. Especially given what seems to be a never-ending road of rising expenses, and significant regulatory risks.
Options traders are betting that the shares plunge below $200 over the next few weeks, while the technical chart points to the same discouraging outlook. You can now track all of my free articles on Seeking Alpha and other websites on this Google Spreadsheet I have created.
Slowing Growth, Higher Costs
Analysts' estimates are forecasting the earnings growth rate to slow in 2020 to 7.9%, down from a growth rate of 13.1% in 2019. The slower growth comes as revenue growth is estimated to fall to 21.1% in 2020 from 26.7% in 2019. The slowing revenue growth seems hard to avoid at this point, as the company's number of daily active growth slows, and the law of large numbers takes hold. In a way, the company has now become a victim of its success, something that is inevitable for a growth story.
Data by YCharts
But Facebook's slowing revenue growth isn't the problem; slowing revenue growth is an issue that comes with maturity. The piece of the equation Facebook should have plenty of control over is earnings per share, and at this point, they appear to have no control, as costs continue to soar. The company noted total expenses rose by 51% in 2019, nearly double its revenue growth rate to $46.7 billion. But Facebook said on its fourth quarter conference call that it sees expenses rise to a range of $54 to $59 billion in 2020 or roughly $56.5 billion at the mid-point, an increase of almost 21%, which is in line with its projected revenue growth rate.
Data by YCharts
Should those expenses come in at the higher end of the range, it will be bad news of Facebook's operating margins in 2020, which have already been trending lower in recent years.
Data by YCharts
It means that Facebook will need to get costs under control in future years, or revenue growth will not be able to support the higher expenses and that is likely to damage future earnings growth.
Data by YCharts
No Longer Cheap
It makes Facebook not a cheap stock presently trading at 19.2 times 2021 earnings estimates. That's because earnings projections for $10.94 in 2021 and $13.17 in 2022 may be too high, especially given what is expected to be a steep drop-off in revenue growth going from 21% in 2020 to 16.5% growth in 2022.
Betting Shares Drop
It could be one reason why options traders are making some big bets that the stock falls. The options for expiration on March 13 have seen their open interest levels at $200 puts rise by almost 21,000 contracts on February 5, and by approximately 4,500 more on February 6. According to Trade Alert, the contracts traded on the ask for between $3.15 and $3.35 per contract on both days, indicating they were bought and is a bet for the stock to fall.
It implies a break-even price for the trader of around $196.75 for the trader that bought them. It means that the stock needs to fall below that price to earn a profit, a drop of almost 7% by the expiration date.
Negative Trends
The technical chart is also negative and shows that stock reached a level of technical resistance on February 5 around a price of $212. Should the stock fail to rise above that resistance level, it could drop to a support level at $203. At that point, that support level becomes a significant level for the stock, because if $203 fails to hold as technical support, the shares are likely on their way much lower, back to $191, a drop of about 9%. However, should the stock rise above resistance at $212, it could go on to rally around back to its previous highs at a price of about $225.
The trends in Facebook seem to favor a stock that is in decline given its spiraling costs, with no apparent end in sight. It means that revenue growth may not be able to sustain the higher expense, and that is likely to severely damage future earnings and the stock as a result.
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This article was written by
I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.
I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.