Can Facebook Stock Rally Over 40%?

The charts indicate that such a rally is possible for FB

By Bret Kenwell, InvestorPlace Contributor

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Improved Instagram Could Be Game-Changing for Facebook Stock

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What can be said about Facebook (NASDAQ:FB) at this point? The company’s Cambridge Analytica issue earlier this year, followed by all the “fake news” political drama, has taken most of the air out of this once-great growth stock. Facebook stock is down 11% so far on the year, but it has declined almost 30% from its recent highs.

Floating just above its 2018 lows, FB stock will eventually fall to those levels, many investors assume. If FB does return to its lows, whether the shares fall below those levels will become a focal point for investors. If FB stock bounces off the lows, the shares could trend significantly higher, but if it falls below those levels, even more painful losses may occur.

Facebook Stock Has Actually Been Resilient

chart of Facebook stock

There is a lot of negativity on the charts of FB stock. But if you want to view the glass as half full rather than half empty, there are some positive developments. Facebook’s low was triggered by the Cambridge Analytica scandal in April. Now think of all the negative developments that occurred after the Cambridge situation and consider that Facebook stock hasn’t retested those lows.

Among those developments were the dreadful second-quarter results that FB reported in July and a data breach involving almost 50 million Facebook accounts. There was also a grilling of Mark Zuckerberg on Capitol Hill, and federal regulators are conducting three separate probes of FB.

So while the charts don’t look great, it’s surprising that FB stock isn’t lower, given the Cambridge news and all of the other news.

The key considerations now will be how the broader market trades, as the PowerShares QQQ Nasdaq ETF (NASDAQ:QQQ) has been under intense pressure, and Facebook’s earnings which are due to be reported later this month.

On Monday, Facebook stock reached new, multi-month lows. It’s trapped by downtrend resistance and the 20-day moving average. Both continue to squeeze the shares lower, pushing them below support levels like $170 and $160.

The Technical Outlook of Facebook Stock

Currently, Facebook stock is trading around $155. If that level holds, Facebook stock will register a higher low than in April and stay above a prior trendline (shown below). It’s also on the 61.8% Fibonacci retracement from the two-year range. If Facebook stock holds that level and clears some of its overhead resistance, it can eventually rebound to its prior highs above $210, yielding gains of more than 40%.

If FB stock falls further, it will test the “double bottom” setup and if $150 doesn’t hold, there’s no clear downside target quite yet. The shares will plunge into no-man’s land. That’s why the April lows are considered a must-hold level.

chart of FB stock

Facebook’s Privacy Woes

Most of the stock’s difficulties stem from privacy issues. Simply put, Facebook has not sufficiently protected its users. As a result, FB has had to spend a great deal of money on security and turn away advertisers. Those moves have weighed on the company’s top-line growth and its margins, creating a double squeeze that investors don’t like to see.

Moreover, Facebook’s privacy blunders have turned off its users. The company recently revealed the extent to which it’s worried about privacy when it introduced a smart device for the home called Portal. It’s loaded with AI features and enables its users to conduct video chats. It also includes Amazon’s (NASDAQ:AMZN) digital assistant, Alexa.

Facebook says the device will not have facial recognition software, will run its main features on the device rather than on its servers, and will have a mute button that will turn off its camera and microphone when it’s not in use. Portal will also include a physical shutter over the camera lens and finally, FB says it will not listen in, record or view users’ video calls.

Sheesh! Do you think the company has had a privacy problem recently?

Maybe Facebook isn’t trying to make money from the product. Perhaps it launched the device to show users that it’s trying to win back their trust. After all, Amazon and probably Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) will launch competing devices. Moreover, Portal is similar to Apple’s (NASDAQ:AAPL) FaceTime, and many customers may feel that their Echo or Google Home already do enough.

Valuing FB Stock

At the end of the day, Facebook’s main objective has to be bolstering the trust of its customers; otherwise, the company won’t be able to grow. Analysts still expect Facebook’s revenue to rise 36% this year and another 24% in 2019. On the earnings front, expectations call for 33% growth this year and 16% next year.

That leaves Facebook stock trading at about 22 times this year’s consensus estimates. That’s not a horrible valuation, but it’s not cheap enough to make investors buy FB if its upcoming results are as discouraging as the previous ones.

Watch $150; it’s a line in the sand.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL and GOOGL.


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/buy-or-sell-facebook-stock/.

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