After a miserable year for Facebook (NASDAQ:FB), the company appears set to go out with a bit of cheer. Facebook stock has moved sharply higher off its recent lows reflecting seeming capitulation among sellers.
Don’t expect this to be a mere dead cat bounce for Facebook either. A combination of technical and fundamental factors are setting up which could power a major rally in coming weeks. Here’s the scoop on FB stock as we enter 2019. Let’s start with this week’s big story.
Citron Swoops in on Facebook Stock
Say what you will about Andrew Left and his Citron Research. While he has a controversial following and a mixed set of stock picks this year, he can certainly still get market participants excited.
He most recently turned his attention over to FB stock. He recently tweeted: “Would you rather have your kids addicted to Nicotine or Instagram?” and said it was time to “back up the sleigh.” To go along with this enthusiasm, he offered a $160 price target for FB stock.
Citron explains the nicotine or Instagram comment by mentioning how Altria (NYSE:MO), a cigarette purveyor, now sells at a higher valuation than Facebook. On the face of it, this seems quite silly.
Interestingly, Citron also paired this against a recent short call against Twitter (NYSE:TWTR). Citron views toxic tweets as a major problem for the company. Describing Twitter as “the Harvey Weinstein of social media”, he feels that its shares will plunge to $20 as the company has to clean up its act which will raise costs while driving users away.
Given that Facebook has already suffered for its scandals, it could be positioned to benefit if negative sentiment shifts toward Twitter and back off of Facebook.
Facebook: Fundamentals Are Strong
It’s more than just comparing Facebook to Altria or Twitter. Consider the whole market. Citron makes a great point about Facebook’s relative valuation. It notes that while Facebook is now growing faster and has higher margins than 90% of S&P 500 components, Facebook stock trades at a discount to the S&P 500’s valuation for the first time in ages. That really shines a light on how cheap FB stock is here.
At this price, FB stock is selling for 18x trailing and forward earnings. That’s pretty good for a large dominant tech company that still has numerous growth opportunities. Where Facebook really shines, however, is on its EV/EBITDA ratio. This measures a company’s overall value against its earnings after deducting costs such as taxes and interest.
On this basis, Facebook stock is at just 8.7x now. That’s crazy cheap for tech, you almost never seen a tech company with a strong balance sheet under 10x. For comparison sake, Alphabet (NASDAQ:GOOGL) and Twitter are still both over 15x despite the recent tech drubbing.
Amazon.com (NASDAQ:AMZN), again, despite a huge sell-off, is going for 28x EV/EBITDA now. FB stock at under 9x is a massive outlier. Additionally, for the first time in the company’s history as a public company, its EV/EBITDA ratio is lower than the S&P 500’s as a whole.
Scandals Will Pass
In the heat of negative news, it can feel like things will never get better, but things tend to turn around. The public has a short attention span, and 2019 surely will bring new corporate scandals to draw media attention.
Right now, Facebook stock is passing through the worst part of crisis management. The public is still paying attention, so any sort of error, such as the recent inadvertent Instagram profile feed change causes outrage. Politicians and journalists are still using the company as a whipping boy.
Take into consideration the fact that Zuckerberg recently stated: “We have over 30k people working on safety, we have made changes that cut engagement and revenues in near term.” As you can see, the company is already paying the price for its recent scandals. Hence the flat earnings expectations for 2019. While the costs come up front, it will take at least several quarters for improvements in Facebook’s quality and safety to appear.
That leaves an opportunity for enterprising investors to buy Facebook stock while most folks are focused on the immediate costs of stepping up product quality, and overlooking the future benefits. Analyst consensus still sees 17%/year earnings growth over the next five years despite the flat 2019 once these cost bumps are digested and earnings growth resumes.
Facebook Stock: Big Reversal Coming
I’ve been bullish on Facebook since buying it earlier this year around $160. That initially looked brilliant, as shares shook off the Cambridge Analytica scandal to cruise back over $200. But since then, it’s been nothing but pain for us Facebook owners.
Regardless, it seems like sentiment has finally exhausted itself to the downside. Shares hit their lowest levels in almost two years on Christmas Eve, bottoming out at $123. As of this writing, just days later, the stock is up almost 10% off the lows.
Thank Citron, thank the huge market rally on Wednesday, or perhaps an end to year-end tax loss selling. In any case, this is a vigorous turn in Facebook’s technical momentum, and should allow fundamentals to help pull the stock back up toward $150 in early 2019.
At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.