When it comes to companies that “have it going on,” few are as relevant as Facebook Inc (NASDAQ:FB). FB practically redefined the term “social media,” and set the benchmark for digital networking. Today, if you don’t have a Facebook account, you might as well not exist. Roughly a quarter of the global population actively uses its services on a monthly basis, making Facebook stock perhaps the most visible investment ever.
Yet based on the FB stock price, the good times may be coming to an end — or at least a definite respite. It’s not that there’s anything disastrously wrong right now. Facebook stock ended the year up nearly 11%.
The company is backed by very strong financials that are the envy of the internet content market. Among the highlights are explosive growth in both the top and bottom line. You couldn’t get tighter financials if you tried, but somehow, Wall Street is seemingly unimpressed.
The problem is capital growth. While FB stock produced double-digit returns for the fourth consecutive year — something that the other “FANG” stocks Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX), and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) can’t say — momentum has slowed down substantially. As a prime example, the boring as cornflakes SPDR S&P 500 ETF Trust (NYSEARCA:SPY) ended 2016 up over 14%. And since the first of November, Facebook stock is down 5%.
FB Stock Is Too Strong to Fail
Obviously, no asset can sprint indefinitely. Corrections are a natural component of a healthy bull market, which implies great things for the future of Facebook stock.
InvestorPlace feature writer Hilary Kramer nails down the optimistic argument. In her late-December article, she notes that revenue “is on tap to expand by more than 50% this year, translating to more than 80% earnings growth. Earnings estimates for Facebook stock have been marching steadily higher — always a good sign.” Despite controversies surrounding the FB decision to crack down on “fake news,” nothing can upend these enormously positive tailwinds.
Even if conservative users are unhappy — suspicious stories’ provenance will be determined by left-leaning media like The Associated Press and The Washington Post — FB stock has one, undeniable trump card. Everybody loves Facebook, and that won’t change. Because of this rabid popularity, the company can look forward to continued growth without worry.
Another highly respected voice from InvestorPlace, Lawrence Meyers, concurs. A begrudging analyst towards FB stock, even he admits the financials are fantastic. Meyers writes, “It has also proven to be a very effective advertising platform, with revenue from each user globally increasing at a rate of almost 40%. That’s just incredible. If you crunch all the other data, I see nothing but good news, as we see increasing user engagement and increasing advertiser spend per user.”
Don’t Ignore the Warning Signs for Facebook Stock
Yet the question remains — why hasn’t Facebook stock picked up on the enormously bullish fundamentals? I think there’s more going on than just “people don’t get it.”
In its first full year as a publicly traded entity, FB stock returned a whopping 110%. The following year in 2014, shareholders were rewarded with a robust 41% return; 2015 hit a very mild road bump, netting investors more than 30%. But at 13% in 2016, that’s a severe demarcation. Again, you could get better performance blindly picking a basket of companies from the S&P 500.
But the biggest concern from a nearer-term perspective is the technical warning signs. Ever since a steep drop off on Nov. 3, Facebook stock has formed a bearish pennant formation. This chart pattern is characterized by a sideways consolidation period, followed by a continuation of pessimism.
Indeed, we’ve already witnessed the impact of bad news towards FB stock. Currently, traders are digesting the overall situation in the markets to determine their next move.
But this “digesting process” implies more downside risk yet to be absorbed. Keep in mind that it doesn’t necessarily have to be bad news — Facebook stock may simply fail to meet lofty expectations.
Investors should keep in mind, however, that this is an immediate assessment. Like many others have pointed out, Facebook stock is built upon a solid foundation. I would be surprised if this is anything more than a blip lasting at longest a quarter or two.
For those wanting to get on board with FB stock, the best idea here is to wait a little bit. This is an important transitory period for Facebook, which could spell a solid discount for patient buyers.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.