Just a few weeks ago, Facebook Inc (NASDAQ:FB) wasn’t looking too hot. After starting the year by exploding to new all-time highs, shares suddenly lost altitude. Unlike the rest of FANG — Facebook, Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) — FB stock very well looked like it could be headed lower.
Thankfully, some much-needed support came to the rescue, helping propel Facebook stock higher. Shortly after, shares went on to hit new all-time highs.
So what got it down in the first place? There’s actually been a few hang-ups since last quarter, but the one that really got the stock down came after comments from CEO Mark Zuckerberg. He told investors that the company was looking to change up its News Feed a bit, getting back to personal connections with friends and family.
Add that to management’s prior comments about increased spending and you can see why investors were leery of Zuck’s comments. While shares popped following the company’s earnings results in October, management said it expects to spend a lot more on security this year. Be it in cybersecurity or ensuring it’s not a hotbed of fake news, FB will crack open the wallet.
The concern with the News Feed is simple. In many investors’ minds, it meant that more friends and family updates equal less advertisements. Less ads equal lower sales growth, which equals lower profit growth.
There’s no guarantee that this will be the outcome, but that’s how the Street initially reacted to the news. While we’ll have to wait to see what Zuckerberg comes up, I’d personally be shocked to see management significantly shake up its bread-and-butter ad platform.
A Closer Look at FB Stock
On a sales-basis, FB stock has a laughable valuation. Trading at more than 15 times its trailing 12 months of sales, it seems wildly overvalued. And despite sporting a market cap of more than $550 billion, one can actually make a reasonable case for owning Facebook stock.
What is that case?
FB stock sports absurd margins. Boasting gross margins of more than 86% and profit margins of almost 42%, Facebook’s business is jaw-droppingly impressive. That’s why, despite its gaudy sales valuation, it trades at a reasonable 28 times forward earnings. For some that may not be too impressive, but before you judge, consider its growth.
Analysts forecast Facebook to grow earnings a whopping 40% for fiscal 2017. Estimates for 2018 show growth of just 14%, which appears inaccurate due to the company now reporting GAAP earnings vs. non-GAAP results. Make no mistake though, FB is still growing quickly.
Sales are forecast to jump 45% this year and another 33% next year. Further, FB hasn’t missed an earnings estimate over the past four years and has beat revenue estimates in fifteen of the past sixteen quarters. So it’s quite likely that analysts are underestimating the social media giant once again.
Aside from its pristine balance sheet and robust margins, Facebook deserves to trade at a premium to the rest of the market. For one, its growth has been and continues to outpace the broader market.
Additionally, its brand power is worth something, as it has over 2 billion monthly users. Don’t you think a company that can instantly reach one-third of the global population is worth a premium? Its other platforms, too, like WhatsApp and Instagram, continue to churn out promising growth numbers.
Trading Facebook Stock
When we look at the chart, we can easily see the stock’s trending support line (in black). The 50-day moving average has not been very important to FB stock and we don’t know how meaningful the 200-day is as it hasn’t been tested in quite some time. Those looking to buy may have some difficulty pulling the trigger now, particularly with earnings on tap Jan. 31.
Call me overly cautious, but with FB stock just below all-time highs, I’m not ready to buy just yet. Perhaps on a decline to $182.50, FB stock would be worth loading up on.
Additionally, trend-line support could come into play around $180 should Facebook stock pullback after reporting earnings.
If trend-line support doesn’t hold, former resistance and current support near $175 should. While I expect good earnings results, I’m simply not in a rush to chase FB stock at current prices.
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.
