Facebook Inc: Bearish Traders May Be Crazy to Short FB Stock

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There seems to be no stopping the freight train that is Facebook Inc (FB).

Facebook Inc: Bearish Traders May Be Crazy to Short FB Stock

Despite plying its trade in one of the more volatile industries, FB stock has defied both criticism and gravity. The social media giant continues to rake in money through advertising fees and a sharply climbing subscriber base.

FB has also been a bright spot in a rather dour market. So why is it that Citron Research is recommending investors should unfriend Facebook stock? Are they crazy, or do they see something that Wall Street refuses to acknowledge?

Issues With FB Stock

To be fair, it’s not just Citron that’s no longer feeling the love for FB stock. Other analysts are not only questioning FB, they’re taking a hard look at the other components of the so-called FANG stocks — Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX) and Alphabet Inc. (GOOG, GOOGL). Of the four, only FB and AMZN are in positive territory for the year.

Of significant concern is NFLX, which is down 17% since the opening day of 2016.

The argument is that these companies oversaturated their respective markets and have no more room for growth.

FB stock, FANG stocks
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Source: Source: JYE Financial, unless otherwise indicated

While FB has an empire, Citron states that it is built on shaky ground. Their argument is best summed up by the question, “do you remember MySpace?” If no, it proves their point. If yes, you are too old to appreciate the whimsical nature of social media.

One of the great problems with internet and technology companies is that the disruptor can be the disrupted. FB stock has risen on the strength of the Millennial generation, but people often forget that the term is a rolling target. In other words, Millennials do age — yes, it’s true — and a fresh-faced generation will eventually take over the coveted 18-to-40-year-old demographic.

What short traders are arguing is that Snapchat is increasingly dominating this future generation.

Of course, the counterargument is the fundamental engine driving Facebook stock. As a young company, FB has all the components you can ask for. Since 2010, revenue for FB stock has gained an average of more than 56%. Year-over-year revenue in the past four quarters is consistently rising, with a growth rate of nearly 46%.

Better yet, only a small portion of top-line sales is taken up by cost of goods sold. Profitability margins for FB stock are also among the best compared to the competition.

The issue, however, is whether this momentum can last.

Facebook Facing a Fall?

Technically, the signs don’t look encouraging. In its first full year as a publicly traded entity, FB stock returned nearly double the money investors put in at the start of 2013. In 2014, however, that margin — though very strong — dropped to 43%. Last year, Facebook stock returned “only” 33%. This pattern of declining returns makes it harder to recommend buying FB stock, especially with a premium of 69 times trailing earnings.

FB stock, Facebook stock
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Source: Source: JYE Financial, unless otherwise indicated

That’s a positive development if you’re looking for consistency. But as a speculative trading opportunity, FB stock has definitely lost its luster.

Yet we have to be careful — this doesn’t mean short FB. Generally speaking, it’s a bad idea to short unless there is a combination of either poor company financials or industry outlook, and technical indicators possibly foretelling a collapse. With Facebook stock, I just don’t see these factors.

Yes, shares are definitely losing steam. That’s not necessarily a negative; it just means that crazy returns should no longer be expected.

Competition is also very stiff, but it’s highly improbable that Facebook will have the ground ripped out from underneath them. More than likely, there will be a gradual decline in revenue. If Wall Street really feels bearish, FB stock will test the strength of technical support.

The most reasonable way to approach Facebook stock is not as a good company gone bad. Rather, it’s a company maturing into its role as an industry leader. That maturity comes with an understanding that the volatile, speculative phase of FB stock may be over.

It’s not a negative transition by any means. However, overly optimistic expectations could definitely result in severe disappointment.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/06/bearish-traders-crazy-short-fb-stock/.

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