It’s not very often that you see a company like Facebook (NASDAQ:FB) with $42.3 billion in cash and marketable securities, operating in the midst of the longest bull market in history, suffer two extreme corrections in less than a calendar year, but that’s precisely what’s happened to FB stock in 2018.
The first correction came in March, when FB stock lost 18% of its value in seven days of trading; the second correction came in late July when Facebook’s stock dropped 22% in just two days of trading.
All of this is happening to a $500 billion market cap at a time when the economy is on fire and company’s are reported record quarterly earnings.
I don’t know if it’s unprecedented, but it’s certainly unusual.
FB Stock Isn’t for Anxious Investors
If you’ve never owned FB stock and are thinking about buying it given how cheap it has become — of the 412 S&P 500 companies that have a price-to-free-cash-flow multiple, Facebook is cheaper than 252 of them — you might want to ponder that thought for a few days because the kind of volatility it’s facing at the moment due to lower margins in the future is putting serious downward pressure on its stock and those pressures might not stop for some time.
Don’t get me wrong, I’ve been a fan of Facebook’s since 2016 and still believe its business model has a lot of positives. However, for anyone who’s not familiar with the company’s earnings history and who only knows the recent issues it faces regarding making its social media platforms safer and more secure, you’re flying into a hornet’s nest.
Is that wise?
InvestorPlace’s Vince Martin recently discussed the reasons FB stock still has more room to fall before bottoming out.
“The question at the moment, however, is whether a better entry point might be on the way. Between the Cambridge Analytica issues in March and the post-earnings sell-off in July, FB already has taken two big hits,” Martin wrote on Aug. 21. “There was a clear ‘buy the dip’ argument after Q2 and it already has faded. Optimism toward the stock seems reasonably low, and it’s not hard to imagine a further sell-off, particularly with a market (or tech) correction at some point during the rest of the year.”
Couple this argument with the reality that Facebook’s daily active users (DAUs) in the U.S. and Canada have plateaued and it’s really easy to make a case for further hits to Facebook’s share price before its next leg higher.
I’m not a technical analyst, but looking at some of Facebook’s long-term charts suggests it might be wise to wait until its 50-day moving average has dropped below its 200-day moving average and then above it once more before considering whether it’s bottomed.
Long-Term, Facebook Is a Buy
If you’re a buy-and-hold investor willing to own FB stock for the next 3-5 years, I don’t think there’s a problem buying in the $170’s — with cash in reserve should it revisit the $150s as it did in March.
InvestorPlace feature writer James Brumley makes the best argument suggesting Facebook is transitioning from social media platform to lifestyle company, and that will generate substantially more revenue from the engaged users it already has than trying to convince every person on the planet with a computer to use one of its platforms on a daily basis.
Doing the latter is merely futile.
Therefore, the issues that it’s having to deal with regarding security and the vetting of content which is affecting its short-term profitability will, in the long run, help it transition to this new lifestyle model.
Has Facebook stock bottomed? I don’t think it has.
However, as it transforms its business model over the next 12-18 months, Facebook margins should start moving higher again, lifting FB stock in the process.
It just won’t be a smooth ride, so buckle up.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.