Facebook (NASDAQ:FB) has quickly fallen from beloved growth giant to public enemy No. 1. That’s left Facebook stock in rough shape and the two-month decline we’ve seen in the Nasdaq hasn’t helped matters. Despite bouncing from its lows, FB stock price still down badly from its highs — by about 35%. Ouch.
It’s left many investors wondering what to do. Some won’t touch Facebook stock with a ten-foot pole. Others are looking to step in and accumulate a position with a low valuation it hasn’t sported in years.
Actually, both investors can be right. As always, investing comes down to timeframe. Simply put, are investors trading or are they investing? Let’s look at FB charts first to see what two levels we’re watching closely.
Trading FB Stock Price
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In mid October and again in early November, you can see how the April lows near $148 helped support FB stock price. These lows came into play after the Cambridge Analytica scandal, crushing Facebook in just a few trading sessions.
However, the stock found a steady stream of buyers near $150, who eventually pushed the stock above $200. In fact, shares rallied hard into earnings in July, where management brought a much more dire tone to party. Facebook stock plunged about $40 in one day, setting the tone for the next six months of trading.
Since then, FB has been in a steady downtrend (blue line), which is the first level we’re watching on the chart. Each downtrend test has resulted in new lows for the stock. If it were to happen again, this would put shares below $130. So the question is, will the 21-day moving average and/or downtrend resistance finally give way or will it knock Facebook stock back down?
The other level we’re watching is $150, which as you just read, are the lows from April. I expect this former level of support to act as resistance — provided that FB stock can get through the 50-day moving average first.
Above both marks and FB stock price can regain some of its lost mojo. But so long as it is under both marks, it’s a tough one for traders to love on the long side. It makes other FANG names — like Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) — seem more attractive based on the technicals.
Valuing Facebook Stock
With FB stocks’s fall, we’ve now got a much lower valuation. By the same token though, we’ve also got significantly lower growth expectations. The quarter wasn’t too bad in October, but it drove home the fact that the Facebook business is not returning to its glory growth days anytime soon. A slew of bad press in November hasn’t helped matters.
In any regard, I’ve seen some investors jumping into FB after having never owning it before. They’re doing so because of its now “cheap” valuation. I find this theory interesting, as investors refused to own Facebook when it had a higher valuation, despite it rallying from $50 to $200. But now that it’s down 35% and in a clear funk, they find it attractive.
I like to marry fundamentals and technicals. Right now, Facebook stock trades at just 18.8 times this year’s earnings. Expectations call for 36% revenue growth this year, alongside 37% earnings growth. These numbers are impressive and the valuation argument appears strong. Where things turn south though is the growth for 2019. Current expectations call for solid revenue growth of almost 20%, but flat earnings growth is the issue.
All in all, Facebook’s fundamentals are okay, but nothing great. It has excellent assets in Facebook and Instagram, but no earnings growth is worrisome. That’s why I’m watching the two levels on the charts to tell me when this name could be back in favor. I’d rather miss some upside and get in with the wind at Facebook’s back, than hope that a bottom is in.
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.
