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Facebook shares responding to rising profits


Facebook shares are picking up momentum, and threatening to break the 185 level following a very positive earnings statement this week.

Quarterly profits were up 79% and revenues by over 50%. The press focused also on CEO Mark Zuckerberg’s criticism of the Russian government’s efforts to use Facebook to influence the last election. Some form of response was needed, to stave of critics in the US government who see Facebook as something of a Trojan horse for Russian propaganda activities.

From Russia with love?

There is no quick fix in the short term to defend Facebook against the Russians, hence the need to hire more personnel to review content. This will radically raise the expenses of Facebook, which, like many other tech companies, has relied on automated solutions to fuel its growth. Now it is back to the good old human being to man the ramparts.

But this increased spending has hit Facebook shares in the short term, as the initial elation wore off. Looking at the one month chart, however, Facebook shares are well above their 169.47 a month ago.

There had been worries about the possibility of increased government intervention in Facebook if it seemed as if the company was not planning any response. For us, the decision to raise spending to protect the network from this kind of abuse was necessary, and would otherwise have resulted in more intervention from Washington DC.

Facebook shares – driven by advertising?

But let’s not forget Facebook’s value as an advertising platform. Reports from media buyers indicate that Facebook is attracting a bigger share of the now critical digital advertising market, with Q3 revenues reported at $10.14 billion, versus a projected $9.71 billion from Wall Street analysts.

These are big numbers, and it is this, more than anything, that is driving the Facebook shares. A Q2 rise of 47% in ad revenue is also spectacular for a business of this size, which has really moved forward to challenge other areas of online media.

Ad load is something that investors will need to consider when approaching Facebook shares. This is the point at which the network cannot take any more volume in terms of advertising without compromising on the user experience. At this stage Facebook would then need to raise prices, something it is already doing. This in turn will make it less competitive.

And out there, lurking like a shark in dark waters, is the next Facebook, the successor tool that will steal it lunch. That, perhaps more than anything, is the item that should be at the top of the worry list for investors in Facebook shares.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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