3 Reasons to Take a Close Look at Facebook Stock on the Next Dip

Advertising is under pressure but not falling apart, so FB stock will be fine

Facebook (NASDAQ:FB) shares have been on a tear, rising more than 57% from the March low to this week’s high. However, FB stock may be starting to roll back over, along with the rest of the market.

3 Reasons to Take a Close Look at FB Stock on the Next Dip
Source: Wachiwit / Shutterstock.com

After hitting a new multi-month high on May 11, FB stock closed lower on the day. The next day, shares slipped almost 2.5% as investors continue to worry about a larger market pullback.

The recent bull trend could be in jeopardy — particularly with so many fund managers speaking negatively — although it’s unclear how painful the potential pullback may be. For Facebook though, there are reasons to be bullish. Let’s look at three of them.

Social Media Isn’t Dead

When Facebook reported earnings in April, the results weren’t so bad. Earnings of $1.71 per share were in-line with estimates, while revenue of $17.74 billion was actually up 17.6% year-over-year and beat estimates by more than $500 million.

Whether it’s been Facebook, Twitter (NYSE:TWTR), Snap (NYSE:SNAP) or Pinterest (NYSE:PINS), we’re seeing the same thing across the board. Digital ad spending is seeing some pressure, but user growth and usage are rising strongly.

In Facebook’s case, daily active users grew 11% year-over-year to 1.73 billion. That topped estimates for 1.7 billion. Monthly active users topped estimates too, at 2.6 billion vs. 2.55 billion, and grew 10% year-over-year.

In other words, social media isn’t dead — it’s thriving. But that doesn’t mean ad spend is necessarily thriving.

The company explained that, despite the increasing usage, many of the mediums it’s occurring on is not built for advertising, (think Messenger, etc.).

However, during Facebook’s conference call, CFO David Wehner said, “After an initial steep decrease in ad revenue in March, we have seen signs of stability reflected in the first three weeks of April.”

That’s good. But he also said: “We are understandably cautious given that most economists are forecasting a global GDP contraction in Q2, which if history were a guide, would suggest the potential for an even more severe advertising industry contraction.”

In other words, cautious but hopeful.

While it’s a different form of advertising, seeing the potential pullback in TV ad spending is somewhat concerning. It shows that the big spenders are yanking back their marketing dollars in this uncertain time. Maybe that flows over to Facebook a bit, but most likely, these companies will use the extra cash to boost their balance sheets.

FB Stock Is a Financial Juggernaut

Fortunately for Facebook, the company’s financials are just fine. Let’s ignore for a moment the fact that the company has grown its revenue at a 26% CAGR over the last four years and that net income has roughly doubled from 2016 to the trailing twelve-month figure.

Instead, let’s look elsewhere on the income statement. On a trailing basis (and inclusive of last quarter’s figures), the company is generating gross margins of 81.7%. Consider how profitable Alphabet is (NASDAQ:GOOGL, NASDAQ:GOOG), then realize it generates gross margins of “just” 55%.

Put another way, 28.5% of every dollar generated in revenue turns to net income for Facebook. This company is a profit machine that it rarely seems to get credit for. Admittedly, Q2 is going to come under pressure, but this is bigger than a quarter-to-quarter story.

As of the most recent quarter, Facebook had $60.3 billion in cash and short-term securities. Current assets swelled to $69.3 billion. At the end of the quarter though, the company did pay a $5 billion fine to the FTC and entered into an agreement with Jio Platforms for $5.7 billion.

Take that out of the equation and FB stock is still in healthy standing. Particularly as it has total debt of just $10.3 billion and as total and current assets are more than four times the size of total and current liabilities, respectively.

Charts Still Look Good

Chart of FB stock
Source: Chart courtesy of StockCharts.com

We can see that the near-term financials may be in jeopardy but are holding up. Its longer-term fundamentals are solid, and now we turn to the technicals.

FB stock continues to hug that steeply rising 10-day moving average. It’s flirted with a breakdown a few times since April, but so far, buyers have stepped up each time the stock has tested this mark.

A break of $200 could get us a quick flush to $195 to fill the post-earnings gap, with $190 likely a decent area of support. There it finds the 200-day moving average and 61.8% retracement. Below that could put the 50% retracement near $180 and the 50-day moving average in play.

On the upside, see if FB stock can reclaim $210. Above puts the recent $215 high in play and over that, the 2020 highs are on the table.

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


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/3-reasons-fb-stock-next-dip/.

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