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Buying This Tech's Breakout Could Mean 10%-Plus Gains by Year-End

Melvin Pasternak

Of the more than 7 billion people on the planet, only about 2.7 billion, or 39%, have Internet access. But if Facebook (FB) CEO Mark Zuckerberg has his way, the world will soon be far more connected. And that plan could create huge profits for his company.

According to the Internet World Stats research group, nearly 79% of people in North America now access to the web. However, this figure markedly declines when you move across the globe. In the Middle East, only about 40% of people can log on to the net. In Asia, it's just 28% of the population, and in Africa, only 16% can get online.

In a recently announced project called internet.org, Facebook will collaborate with several leading tech companies -- including Nokia (NOK), Qualcomm (QCOM) and Samsung (SSNLF) -- to make the net more accessible for the more than 4 billion people who don't have it.

Spearheaded by Facebook, the project will aim to lower Internet usage costs and build apps whose data capability will help link the world.

While Zuckerberg says, "Connectivity is a human right," his motivation is not likely purely altruistic. Connecting users across the planet will help Facebook increase its usage rates and drive more eyeballs to its revenue-generating ads.

In the most recently reported second quarter, income from ads accounted for 88% of Facebook's total revenue, with mobile bringing in 41%. During the quarter, Facebook sold a record $1.6 billion in ads -- a 61% gain from the year-earlier period.

The company now attracts more than 1 million advertisers from across the world, double the number from a year ago. Based on increased mobile ads, and a higher number of ads in user news feeds, Facebook's profit hit an all-time high in the quarter. Additionally, the number of Facebook users rose 21% compared to the year-earlier quarter.

Ultimately, Facebook's current market will become saturated. To increase viewers of Facebook ads, more of the world's population will need to be tapped. That's where enhancing global Internet accessibility could prove a strategic coup for Facebook's ad revenue generation.

From a technical perspective, FB's chart finally appears bullish after a disastrous IPO.

FB Chart

A little more than a year ago, the stock went public at $38 and quickly surged to $45. However, rumors surfaced that the underwriters had issued too many shares at too high a price. Allegations were also made that insiders had alerted contacts about earnings prospects before this information became public. 

Within weeks, shareholders lost confidence. By September 2012, the stock had plummeted to an all-time low of $17.55, losing more than 60% of its value.

The stock then struggled to regain its original issue price. In early 2013, shares recovered to $32. Encountering resistance, they resumed their downtrend and fell to a secondary low of $22.67 in June.

FB has risen dramatically off those lows. In late July, when second-quarter results were issued, shares soared nearly $10 in a week, blasting through $32 resistance and breaking the major downtrend line in the process.

The following week, the stock jumped about another $3. In early August, shares hit a new 52-week high of $39.32. Then, on Aug. 23, FB blew through resistance, penetrating round number resistance at $40.

The next major resistance level is the IPO all-time high of $45, which is about 11% above current prices. However, with no historical resistance in sight, FB could go much higher.

The bullish technical outlook is supported by strong fundamentals.

With an expected continued increase in mobile advertising, analysts project total revenue will grow 49% in the third quarter, hitting $1.88 billion compared to $1.26 billion in the year-earlier period. For the full 2013 year, analysts expect revenue to increase 44% to $7.32 billion from $5.09 billion last year.

The earnings outlook is equally solid. Analysts estimate Q3 earnings will increase 50% to $0.18 per share from $0.12 in the comparable year-ago period. And full-year 2013 earnings are expected to rise 34% to $0.71 per share from $0.53 last year.

Risks to consider: The overall market, as represented by the S&P 500, is showing some signs of toppiness. But FB just broke a key resistance area and looks set to move higher.

Recommended Trade Setup:

-- Buy FB at the market price
-- Set stop-loss at $35.98, slightly below a small shelf of nearby support
-- Set price target at $44.97, just below the projected target of $45, for a potential 11% gain by year's end

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