Almost two months ago, we said that Facebook Inc (NASDAQ:FB) is a buy, regardless of the inevitable pullback. FB stock is up nearly 8% since then. It also includes another applaud-worthy earnings report. So, what now?
In the last quarter, Facebook grew revenue by almost 50% year over year to $8.03 billion. Revenue came in ahead of analysts’ expectations, while earnings came in 16% above consensus estimates. I found the sheer number of users to be the most stunning, though. Daily active users climbed 18% to 1.28 billion, while monthly active users climbed 17% to 1.94 billion.
So many people have been shooting against Facebook over the years, whether it was the metric reporting issue to advertisers, higher costs or ad and user saturation. There’s been reason after reason to bet that “this is it” for FB, but somehow, the stock keeps churning higher.
Looking Ahead With Facebook
FB stock is up 32% on the year and Facebook now sports a market cap of $442 billion. While the rally seems unsustainable, why does it have to end? We’re not unrealistic about the possibilities of a pullback. But, as of now, Facebook’s business continues to hum along.
Twitter Inc (NYSE:TWTR) has a goldmine in real-time news if management can figure out how to unlock the value. And, Snap Inc (NYSE:SNAP) has captured young users’ interest, although Facebook’s Instagram has been pushing back.
Although some may question Instagram’s copying tactics against Snapchat, it’s hard to argue its effectiveness. Although it has recovered about half of the losses, SNAP stock plunged more than 20% after its first earnings report a few weeks ago.
The point is relatively straight-forward: 16.4% of the total world population logs into Facebook on a daily basis. More than one-quarter of the world does so monthly. This is vastly more impressive if considering that, as of 2015, less than half the world even has internet access. This is to say that FB dominates the social media world and it looks as though that will continue.
Because Facebook is so profitable, it can afford to increase costs. It can explore new avenues for growth and look for ways to increase value to advertisers. It can also look to improve user experience. Guess what higher value for advertisers and a better user experience leads to? Yep, more money for Facebook.
Original content, ordering food delivery via Facebook and a number of other initiatives will be hit-or-miss over the years. But, watching FB squash Snap in essentially six months’ time goes to show just how powerful it is. There’s little reason to bet against that changing now.
Trading FB Stock
While there may be little reason to bet against Facebook, trading it is a different story. In the case of FB stock, it’s a mixed bag. After exploding from $140 to $154, the stock is now consolidating a bit.
Momentum, as measured by the MACD, has turned bearish (purple circle). However, it was a necessary evil in order to work off the overbought condition, as indicated by the relative strength index. The orange circle up top shows where it was overbought vs. a current RSI reading close to 50.
Until FB stock breaks below the 50-day moving average, it’s hard to be too bearish. Above that level and investors can remain long. Traders could even justify buying the stock and using that level as their stop-loss.
From an investment standpoint, getting Facebook on a deep pullback would be more attractive than buying at current levels. Buying in the low-$130s would be desirable, but there’s no telling if or when that will occur.
Eventually, FB stock — as will all stocks — will get caught up in a swift move lower. It might be 10%, it might be 30%. That’s when I’d look to buy Facebook for the long-term. I’d use similar approaches for stocks such as Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOGL) and Amazon.com, Inc. (NASDAQ:AMZN) as well.
Until then, I would only trade FB from the long side.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no positions in any security mentioned.
