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Facebook shares are set to crater

Social media giant Facebook Inc. is set to lose around one-fifth of its value in trade on the NASDAQ tonight if ‘after hours’ trade matching is an accurate guide as to its price action later.

Source: Google Finance

The expected price falls are on the back of Facebook missing analysts’ expectations for the quarter ending June 31 2018, even though revenue and profit came in 42% and 31% higher respectively than the prior corresponding period.

For the quarter Facebook posted a profit of US$5.106 billion on revenue of US$13.038 billion, with earnings per share clocking in at US$1.74.

The weaker-than-expected revenue growth comes over the first full quarter since Facebook faced down the Cambridge Analytica data sharing scandal, with many claiming that its daily active user growth was likely to come under pressure.

Over the quarter daily active users grew 11% to 1.47 billion, with strong emerging market growth offset by weakness in the U.S. and major European nations.

In reality the main growth driver for Facebook remains its Instagram photo sharing platform that I expect could grow to be as big as the Facebook platform over time.

According to The Wall Street Journal Instagram is currently generating revenue around US$2 billion a quarter, which would represent only around one-sixth of total revenue and shows the huge growth potential ahead.

Tonight’s likely price falls also need to be placed in the context of a stock racing around 20% higher over the past two months on nothing more than improved investor sentiment.

As such the stock will only be giving back recent gains that suggest its valuation got ahead of itself.

Should you buy?

Clearly the Facebook platform is a maturing business, but given the superb outlook for Instagram and the company’s market-leading status in the technology space I expect tonight’s price falls will be a golden buying opportunity.

In fact the success of the US’s FAANG stocks is shaping up as a once-in-a-generation wealth transfer from Europe and the rest of the world to U.S. stock market investors, with this phenomenon not likely to end yet.

The last time this kind of Europe to U.S. stock market investors wealth transfer happened was during World War I, with the total value of the FAANG stocks now comfortably more than US$3 trillion dollars….

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Motley Fool contributor Tom Richardson owns shares of Alphabet (A shares), Amazon, Apple, and Facebook. J

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ohn Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. TThe Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Amazon, Apple, Facebook, and Netflix. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Amazon, Apple, Facebook, and Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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