Why Facebook Inc (FB) Stock Is Going Down to $91

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Call me a glutton, but I’m going to be like the child in the Hans Christian Andersen fable The Emperor’s New Clothes and say what everyone else is likely to afraid to acknowledge. That is Facebook Inc (NASDAQ:FB) is more than fully valued given its plausible prospects, and Facebook stock is due for a sizeable selloff.

And make no mistake — I am in the minority on the matter. Not only is FB still a hit with consumers and still well loved by investors, but Facebook stock is highly rated by analysts.

As of the latest look, it collectively rates slightly better than a “Buy” (and is leaning towards “Strong buy”), it sports an average price target of roughly $157. That’s 19% better than its current value near $132. In other words, I’m going against a lot of grain by predicting a FB stock pullback.

Nevertheless, if the time and situation are right, the caution bell has to be rung.

Why Sound the Alarm for FB Stock Now?

Calling a spade a spade, Facebook stock has been downright heroic since the middle of 2013. Shares have gained well over 400% during that time.

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And to be fair, it was more than a well-deserved runup. The social networking site’s revenue has grown from $7.8 billion that year to $22.2 billion over the course of the past twelve months. Earnings have grown similarly.

There are limits to FB stock, however. Problem is, more often than not the faithful bulls who have watched Facebook perform so well in the past choose not to see the writing on the wall if it doesn’t jibe with an unwavering assumption that things never change. Things are changing for FB right now, and although it’s only a relatively small disruption looming, it will catch too many investors off guard.

The brewing impasse? There are two of them, actually, though they work together.

The first one is the increasing ineffectiveness of mobile advertising.

Actually, mobile ads have never been especially effective given the money spent on them. Mobile banner ads have a click-through rate of only 0.14%. Advertisers have continued to use them because they know they have to spend money somewhere. They’re not entirely sure how well mobile ads actually generate business though. That’s changing though, as more and more marketers are starting to get a better grip on their ROI.

Underscoring this idea (and perhaps partly the cause of it) is the fact that ad-blocking technology is getting very good and very common. Based on the current trend, mobile ad-blocking tools will be in place for 80% of mobile users by the end of 2017. And yes, even the impenetrable FB mobile app can no longer fend off ad-blocking technology.

The second headwind that could quickly and radically change the bullish rhetoric that has kept Facebook stock so strong for so long is the simple reality that FB’s interest/engagement is at or near full capacity. That is to say, the amount of time the average user spends on Facebook per day is almost static.

Sure, Facebook can simply attract more users, but that growth trend is slowing too.

That’s not to say Facebook is in dire straits or won’t continue to be a cash cow. It’s not the kind of performance most FB stock owners have come to know and expect though. Once reality sets it, panic could follow.

And that reality is positioned to set in soon.

While the underpinnings of a pullback are fundamentally driven, FB stock is still a stock and is subject to the same technical forces — bullish and bearish — as any other stock.

Said another way, the chart still means something.

The tricky part about technically handicapping Facebook stock is that there is no historical context to work with — no prior highs or lows that point to likely peaks and troughs. The stock has been moving higher since 2013, pretty much in a straight line. The context is there though. You just have to go back to the 2013 lull to see it. That bottom is a starting line of sorts, and serves as the starting point for a technical analysis tool that provides contact when nothing else will. That tool is a set of Fibonacci retracement lines.

The quick and dry explanation of Fibonacci lines: They tend to mark where the psychological nature of trading should kick in. That is, they answer the question how far is too far before the bulls or the bears have to step in.

Why Facebook Stock Is Going Down to $91
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And for Facebook stock, the most plausible downside target based on a 38.2% Fibonacci retracement line of the 2013 to 2016 low-to-high span puts FB stock right around $91 before the bears run out of willpower and the bulls go bargain hunting.

That’s admittedly a big step back … a 31% slide from the recent high, to be exact. There’s another subtle but important clue on the chart, however, that suggests this rally hasn’t been nearly as well supported as it seems for months now.

That is, there’s an uncomfortable lack of volume behind it. There are few buyers. There are just even fewer sellers, so far.

Bottom Line for Facebook Stock

As is quite often the case, technical analysis of Facebook stock is actually supported by reasonable fundamental standards. At a price of $91, 2017’s estimated earnings of $5.08 per share translate into a reasonable forward-looking price-to-earnings ratio of 17.9. On a price-to-sales basis, 2017’s anticipated revenue of $36.7 billion would translate into a frothy 7.1, even with the pullback to $91.

Will it happen? Clearly, nobody has a crystal ball. Thing is, “expect it when you least expect it” has historically been surprisingly good advice for stock pickers.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/facebook-inc-fb-stock-down-91/.

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