U.S. Markets open in 8 hrs 52 mins

Facebook Stock May Be Setting Up as a Buy

Bret Kenwell

It’s been a highly volatile ride for Facebook (NASDAQ:FB) stock so far in 2018. Long-term investors may argue that shares are down just 1% so far for the year. However, FB stock has had extreme moves in both directions.

The shake-and-bake price action has frustrated investors, while nimble traders have had the potential to make a killing. So what now?

Investors are no doubt wondering if they want to part ways with Facebook. That self-reflection is being exacerbated by the near-endless set of options in the stock market. Should investors sell FB stock and buy other FANG behemoths like Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN) or Netflix (NASDAQ:NFLX)?

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

All three have generated vastly superior returns compared to Facebook, compiling year-to-date returns of 17%, 63% and 87%, respectively. Despite its large correction, even Twitter (NYSE:TWTR) has outperformed Facebook, rising more than 42% so far this year.

Social Media Stocks

The entire social media space has been under intense pressure lately. Be it Facebook, Twitter or Snap (NYSE:SNAP). The group’s been pressured after reporting earnings, and each for different reasons.

Some investors are wondering whether it’s time to jump ship, while others want to know if now’s the time to go long. The answer isn’t one-size-fits-all; it depends on the investor, their risk tolerance and their time frame.

While I would avoid Snap at this point, Facebook and Twitter are looking attractive. Regarding Facebook specifically — after all, we are talking about FB stock here! — management’s most recent quarterly report took all investors off guard.

Severely cutting expectations, while warning on growth and costs understandably spooked plenty of investors. Although expectations have come down notably — with earnings per share estimates falling from $7.70 30 days ago to just $7.12 currently — the growth here is still impressive.

Based on current estimates, Facebook should grow earnings about 34% this year, along with sales growth of about 37%. Given that revenue growth is forecast to outpace earnings growth, that does indicate margins will come under pressure.

It should be noted that FB already generates some ridiculously high margins. While they have been falling, trailing gross margins are still near 85%, while profit margins are near 40%.

This isn’t just atop the social media leaderboard; it’s a standout among the entire market. Particularly for a company with a $500-billion market cap company.

Worth pointing out is that estimates call for revenue to grow 25% in 2019 and for earnings to grow 16%. That kind of growth may have investors thinking the best days are behind Facebook, and perhaps they are right. But FB is taking measures today to ensure its company survives for the long term, exactly what you’d want from management.

Trading FB Stock

chart of FB stock


Click to Enlarge

At the moment, FB stock trades at roughly 24 times this year’s estimates and about 20 times 2019 estimates. If growth really does slow to mid-teens and margins remain under pressure, one could make a case that the upside is limited in Facebook. However, stabilization in its business or more clarity in the upcoming few quarters could change investors’ mindset.

Make no mistake, we’re not calling FB stock a flat-out buy right here. But those with a long-term outlook and willing to buy Facebook in stages rather than all at once could benefit. So could investors with shorter-term outlooks.

Facebook’s fundamentals are worsening, but that doesn’t mean they’re bad. Does that make sense? Just because a company is worse than it was yesterday doesn’t mean it’s a bad company.

Further, the charts are setting up favorably for bulls. With support near $170, FB stock may be a worthwhile long near current levels. On a close below $170, short-term investors can bail. Long-term investors can stay long and look to add on a further dip, perhaps down near the March lows around $150.

We’re getting a mixed signal on the MACD and money flow indicators. The first (blue circle) shows that momentum may be shifting back into the bulls’ favor. But the second (yellow circle) is not confirming the bullish move.

So we have a mixed picture, and given the fundamental outlook, that’s not a surprise. Tread carefully, know your time frames, and know your levels — particularly with FB stock.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Compare Brokers

The post Facebook Stock May Be Setting Up as a Buy appeared first on InvestorPlace.