Shares of social media giant Facebook (FB - Free Report) gained over 3.5% in morning trading Monday as investors reacted to the announcement of the company’s first-ever share repurchase. After the closing bell on Friday, Facebook said that it will soon be buying back $6.0 billion worth of FB stock from its investors.
Stock buybacks typically lead to higher share prices because they generally improve shareholder value. As the company buys back its own shares, the total number of outstanding shares on the market is reduced, and the ownership stake of every other investor increases.
Facebook will begin its share repurchase program in the first quarter of 2017, and its SEC filing indicates that the company will execute an open market buyback plan. This means that Facebook will repurchase its shares at whatever the market price is at the time, just like an individual investor would.
While this announcement has moved shares slightly higher, not everyone is entirely convinced of the motives behind Facebook’s first buyback. Although companies typically justify repurchase programs as “investments in themselves,” not every buyback is a result of the fundamental strength of the stock. Oftentimes, buybacks are a way for companies to artificially move its struggling stock.
Shares of FB are down more than 5% since the release of its third-quarter earnings release earlier this month, and although the company was able to beat on both the top and bottom line, investors were concerned by its cautious outlook for the future (also read: Facebook Q3 Earnings Top Estimates, Outlook Cautious).
In short, Facebook said that investors should continue to expect continued growth in ad revenue, but those figures will now face tougher year-over-year comparisons in the near future. The company also said that ad load, which has been a leading factor driving ad revenues, will cease to be in the coming quarters, and ad revenue rates will “come down meaningfully” as a result.
While this cautious outlook has many investors questioning the motives behind Facebook’s new buyback plan, the stock remains a Zacks Rank #2 (Buy) based on the strength of its recent earnings estimate revision activity. Facebook may see some challenges next year, but analysts remain bullish on the company in the short-term, and we’ve seen eight positive revisions for its current-quarter earnings over the past month.
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