Facebook’s success or failure determined by ROIL

“Nothing is so painful to the human mind as a great and sudden change.”

― Mary Wollstonecraft Shelley, Frankenstein

We got that sudden change last night from Facebook when they announced quarterly results. I said to me their success or failure would be determined by ROIL, Revenue, Operating Margins, Instagram and Legal. Of those four factors, only revenue came in as a positive. The other three were dismal failures for Mr. Zuckerberg and Facebook shareholders.

As for my account, I had the good fortune of riding the wave from the low $150s up to last night’s close. I’d rolled up profits time and time again on that run. I was optimistic in my outlook, but as stated on CNBC yesterday, had exited all my stock positions in FB and was just in a call vertical spread, owning the 215 call and short the 225 calls. That spread was vaporized as fast as Mr Zuckerberg’s $17 billion in paper losses on the after-hours dump. Am I bullish on Facebook here? No. If the CFO is right about the margins sinking into the “30% range over the next couple years” I think there is more damage to be done.

It had been a great ride, but until we see lower prices, I will be watching rather than trading Facebook.

ROIL

Revenue – Advertising Revenue $13.0 billion up more than 42% year/year & mobile advertising rose to 91% of total ad revenue, up from 87% last year.

Operating Margin – Fell to 44% from 47 percent a year ago. Worse yet, CFO Wehner said it, “will sink to the mid-30s for more than two years.

Instagram – Even though Instagram now has over a billion users, 10% or so of those may be bots. That’s not good for advertising growth in Instagram and although Insta, WhatsApp and Messenger are the fastest growing part of Facebook, only Insta generates meaningful sales. Read this Article on Ghost or Bot accounts

Legal & Regultory – Total costs/expenses $7.4 billion versus $4.9 billion year/year. Facebook is spending on cleaning up its act like never before. Some of this is from the Cambridge Analytical scandal and a lot from the EU’s General Data Protection Regulation (GDPR).