After hitting new 52-week and all-time highs earlier this week, Facebook Inc (NASDAQ:FB) had an abrupt pullback Thursday. Those looking at FB stock price today may be wondering if now’s the time to take profits or stay the course. New investors may be wondering if it’s time to buy.
One thing that, in my opinion, actually worked out as a great catalyst for FB stock? Skepticism. There were always two types of skeptical investors for Facebook. First, there were those that thought Facebook could be “Myspaced.” Meaning that eventually the “fad” would end and the collective internet population would head to a new platform. Second, there were those that have continually said FB stock’s valuation is too high.
Skepticism, like why investors feel the overall market can’t rally any further, is what helps drive it higher. Everyone (seemingly) has one foot out the door. The euphoria around market tops is simply not here. The valuations are stretched, but not unreasonable. I’m all for a market correction and wrote that it’s absurd we haven’t even had a 3% pullback in almost eight months. It’s the same thing with FB stock price today. It continues to grind higher and higher. Investors remains somewhat skeptical. Its valuation is stretched, not absurd.
Valuing FB Stock
I can’t say “it’s clear that Facebook” won’t become the next Myspace. But saying that FB will go down that road is like saying Apple Inc. (NASDAQ:AAPL) will become the next BlackBerry Ltd (NASDAQ:BBRY, NASDAQ:BB). It’s not impossible. But Facebook and Apple have become behemoths compared to Myspace in BlackBerry, even in their heyday, so it wouldn’t be something that keeps me up at night.
Should the valuation cause restless nights? Admittedly for some, it might. On a pure numbers basis, we have FB stock price today trading with a price-to-earnings (P/E) ratio of 39. It carries a forward P/E ratio of 26.5. So is it cheap? No, not really. But I don’t think it’s as black and white as that.
The social media juggernaut is expected to grow sales 42% this year and another 30% in 2018. Given that FB hasn’t missed on revenue estimates in more than two years, perhaps 2018 estimates are too low. Analysts expect Facebook to grow earnings 26% this year, 22% in 2018 and at a more than 27% pace for the next several years.
Further, gross margins, operating margins and profit margins are all at new highs. Finally, With Instagram, Facebook, WhatsApp and others, the company connects more than 2 billion people worldwide. Facebook is the best of the best in social, easily topping Snap Inc (NYSE:SNAP) and Twitter Inc. (NYSE:TWTR).
So with all that said, FB stock certainly deserves its premium valuation.
Trading FB Stock Price Today
Here’s my one concern: Expenses. The company, especially in its upcoming fiscal third quarter on Nov. 1, has been known to take a cautionary tone, particularly when it comes to its rising expenses. So far management hasn’t had trouble on this front nor with growing revenue at a torrid pace. So perhaps investors will take these comments with a grain of salt.
But any sort of cautionary talk from management could easily send Facebook stock lower. Extrapolating on that concern is more than just management chatter. The company’s making a big push into video and growing its virtual reality footprint. While both can be huge catalysts in the future, increased spending could really crimp the bottom line, causing margins to contract. Particularly with Facebook unveiling its new Oculus Go VR headset and making its final push to launch its Facebook Watch video platform.
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So what do we do with Facebook stock price today?
Shares bounced perfectly of the $172.50 area, which had been previous resistance. This level now looks likely to act as support, although the strength of it is questionable, at best. With FB stock is up more than 51% this year, some sort of pullback can easily be justified.
I wouldn’t be a new buyer right here, unless I was only thinking short term. On the chart, there are two blue trend lines. Both come into play between $165 and $167.50. Additionally, the 50-day moving average currently sits near $170. There is plenty of support for FB stock price today. Longs can trade against those lows.
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.
