Stock owners fall into two categories. There are those who are in looking to invest for the long haul. And then there are those who prefer to trade momentum, which tend to be shorter term.Today’s write-up is to examine how Facebook (NASDAQ:FB) stock now presents the opportunity for both traders and investors. There is a technical breakout brewing in FB for the short term with 20% upside potential. But even if it fails the trade can be a viable long term investment.
But first I’d like to recognize the geopolitical headlines that threaten stocks this week. If the bond market continues its breakout here, then all stocks will fall. So consider that and how it influences even quality stocks like FB.
The FB Fundamentals
Facebook is a giant advertising company and it has unparalleled reach. Those who use it for business love what it does for their marketing campaigns. Last year it suffered great trepidation from a data sharing incident but it has so far survived the repercussions from it. There are still those who are calling for its head but I doubt that they will be successful.
As big and as popular FB is, it will take a special kind of mistake to mess that potential up. They have billions of users using their platforms every day and for hours at a time.
The fundamental metrics of FB stock are solid. it’s a cash making machine and it’s not bloated. It sells at a 27 P/E ratio. This is inline with Alphabet (NASDAQ:GOOGL) and 60% cheaper than Amazon (NASDAQ:AMZN). I can also compare FB to Apple (NASDAQ:AAPL) and Twitter (NYSE:TWTR) which aren’t perfect comparisons but help with perspective, they have 16 and 21 trailing P/E respectively.
Moreover, FB is up 40% year to date which is almost three times better than the S&P 500, twice as good as AMZN and four times better than GOOGL. Clearly investors are liking FB stock in 2019. Facebook is up 200% in five years.
So for now, Facebook doesn’t carry undue risk for those who own its shares. So betting on it here has relatively small financial risk in the long term. There is value below so even if the stock market temporarily corrects, Facebook stock will eventually find footing. Besides, the market-wide selloffs that we had last year helped establish great support levels.
So in summary, the fundamentals are strong enough that we can assume that if the stock markets are higher in the future then so is Facebook.
The Technical Opportunity in Facebook Stock
When a stock trading range tightens into a fine point, it builds energy which will need to release itself. This often results in a big move in either direction. This is the case for FB stock now.
The trading range since their recent earnings report is now very tight, and the bulls are pushing up against descending trend line. FB is setting higher lows and lower highs coming into a head. Soon enough the bulls should be able to overwhelm the bears and launch a breakout 20% rally.
There will be resistance around $190 per share once they get there, but that too will be the opportunity to invite even more momentum buyers there. Eventual, I expect the rally to fill the gap at $215 that happened last year.
I know there will be critics of this ides. Rver since the Cambridge Analytica incident, FB has become an emotional stock. But if I cover up the ticker and simply examine the chart, this is the upside scenario that I see as most likely.
Outside Factors Affecting FB Stock
Of course, these are uncertain times. Wall Street is at risk daily from geopolitical headlines. This is likely to linger for months as the U.S. and China conduct their economic war in the headlines. These are unpredictable so they can ruin the best technical setups.
Since we can’t incorporate black swan events into a trading thesis I accept the risk of this trade but I don’t make it so excessive that it breaks the piggy bank. The Facebook chart presents a realistic opportunity where the downside risk is much smaller than the upside reward.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.