Don’t Go Rushing Into Facebook Stock Just Yet

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FB stock - Don’t Go Rushing Into Facebook Stock Just Yet

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Facebook (NASDAQ:FB) still hasn’t recovered from its second-quarter earnings report. FB stock has pulled back over 25% from pre-earnings highs. Save for a dip in late March, Facebook stock is not far from its lowest levels in over a year.

There’s a bull case here, for sure. I thought FB stock was a buy heading into that second-quarter release. But a slowdown in users and an increase in guided spend led Facebook stock to plunge almost 20% — and set a record for the worst trading day in stock market history.

And as Will Healy pointed out back in August, FB stock has been here before. The Cambridge Analytica scandal sent the stock reeling earlier this year; Facebook stock would gain almost 40% from those lows in just four months ahead of the Q2 wipeout.

Indeed, I still think there’s a long-term case here. A forward price-to-earnings multiple of under 20 is even cheaper (about 17.5x) backing out the company’s net cash. That’s not a valuation that suggests much growth — and easily prices in the seeming bad news from Q2.

But I’m not sure the market is ready to buy into that long-term case just yet. And ahead of Q3 earnings at the end of this month, I’d be cautious about stepping into the dip just yet.

The Sentiment Toward Facebook Stock

What’s interesting about Facebook stock is that investor sentiment isn’t all that different from user sentiment. That’s because there’s a huge amount of overlap between the two. Facebook’s daily active user base in the U.S. and Canada is roughly half the entire population of those two countries (including children). The majority of Facebook shareholders — and the majority of all investors — use Facebook regularly.

That’s not true for any other company. Half of investors don’t drive a car from Tesla (NASDAQ:TSLA). Even Apple (NASDAQ:AAPL) has less than 40% market share in U.S. smartphones. Other than maybe Procter & Gamble (NYSE:PG), Starbucks (NASDAQ:SBUX) or Coca-Cola (NYSE:KO), it’s hard to think of too many companies with such widespread penetration among its own investor base.

So, it’s worth paying attention to the market’s sentiment of late. Facebook stock is going to come down to its users. Many of those users aren’t enthusiastic enough toward the platform to buy the stock right now — and that matters in a way that it might not for most other stocks.

One More Cockroach?

There’s also a sense here that there may be another shoe to drop. There was the Cambridge Analytica scandal. The news delivered on the Q2 conference call came out of nowhere — and no doubt exacerbated the post-earnings decline. And then, this week, there was news about a data breach on the namesake platform.

There’s been criticism of management from WhatsApp founder Brian Acton. That platform has been tied to lynchings in India. Facebook has been connected to violence in several Asian countries as well. And regulators in both the US and the European Union still have their eye on the site.

The perception of Facebook on the whole simply has changed this year. And I’m not sure that’s necessarily ending any time soon — or that what’s become a global behemoth won’t become a target again.

The Case for FB Stock — Eventually

Meanwhile, the company has an interesting — and potentially key — earnings report coming up on Oct. 30. Expectations are low on the earnings side: Street consensus suggests a year-over-year decline before a bounce-back quarter in Q4. A strong quarter and better commentary could convince investors that the company is back on track — and lead that earnings multiple to expand.

But with the long-term outlook more cloudy, I’m skeptical Facebook can change the narrative with a single quarter. User growth likely is hitting a ceiling — if only because the user base already is so massive — and there’s no reason to believe that the company will bring costs in quickly after guiding for a steep increase back in July.

Long-term, FB stock fundamentally is too cheap. In this market, in particular, companies still driving double-digit earnings growth — as Facebook is expected to do next year — don’t trade at 17 forward P/E multiples. But there’s still the long-term risk that some new rival could undercut the platform — or that users could simply see Facebook as more trouble than it might be worth. And that risk is weighing on Facebook stock right now.

At some point, that very well may change. But “at some point” doesn’t necessarily mean in the next three months. I thought back in August that FB stock still had further to fall — and even 6%+ lower, and six weeks later, I still think that’s the case.

As of this writing, Vince Martin has a bearish out-of-the-money options position in Tesla. He has no positions in any other securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/10/dont-go-rushing-into-facebook-stock/.

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