Much of the recent trading discourse has focused on “novel coronavirus stocks to buy.” These are the companies that have benefited from the global quarantine. When the world locked itself at home, people flocked to social media platforms. These are large-cap technology stocks that trade alongside high-flyers like Amazon (NASDAQ:AMZN) and Nvidia (NASDAQ:NVDA). But now, as the world goes back to work and unshackles its people, the level of interest in social media stocks should wane. We saw a preview of this on how the Nasdaq soldoff hard on Wednesday, while small-cap stocks and banks were up 2% and 5%, respectively. Rotation like this is normal. And that’s where today’s opportunity comes in.
I have an overall bearish bias on equities because stocks have no business being at all-time highs when there are 25 million people out of work. The stimulus money will run out soon and there could be hidden carnage that may come to light. These social media companies may also suffer the dip from the Covid-19 sugar high. This doesn’t mean that the stocks are dead because there will be new habits that will continue post quarantine. Many first-time users will stick with newfound social media services even after this crisis. These incremental users will translate into new profit opportunities and stronger stock performances.
Having said that, this also doesn’t mean that investors should buy all of them and all at once. There are champions that will win regardless, and others that require more precise entry points. Today we tackle the three major social media stocks:
Facebook stock is my favorite and it is up 13% year-to-date. This is almost double the performance of the NASDAQ. And the other two are lagging by five or nine points.
Social Media Stocks to Trade: Facebook (FB)
The short story for FB stock is that if you’re not long already, the better swing trade is to at least wait for it to retest the neckline. The stock came to life recently on headlines of new revenue streams. The breakout actually happened more than a week ago, when it crossed $215 per share. The trade was to buy the breakout to capture a $45 rally or more. It has since done half, so buying FB stock here assumes that everything is going to go right with the economy for the next six months. I prefer buying the next dip in Facebook, like I’ve written about it several times. All of the trades have clearly yielded profits since it just set a new all-time high. The first decent starting point is near $215 per share.
The company has strong fundamentals because it is an incredibly profitable and is doing everything right. Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) should worry because Facebook is coming at Google hard. But it cannot rally alone and I have concerns over the entire stock market at these levels. Often, when a stock rallies this fast, it is best to miss out on a few upside bucks to avoid buying it near interim tops.
Investors should not worry much over it not being a cheap stock. Those who shorted Amazon a decade ago because of value lost a lot of money. The same concept extends to Facebook now because they are growth companies. Besides it’s not bloated either with a price-to-earnings ratio of 28. This leaves room for it to grow and not a lot of fat for it to shed. It has many critics, but I am not one of them. It shrugged all headlines that caused worry on Wall Street and in Washington. It is easy to forget that U.S. users make up only but a small fraction of Facebook’s 3 billion active users. Clearly, FB stock bulls are happy.
Snap (SNAP)
SNAP stock has periods of brilliance, but it isn’t consistent yet. After its strong IPO, it fell apart from a high of almost $30 per share to below $5. It took months for SNAP stock to recover and snap out of the hideous descending channel that lasted two years. Then, in June of 2019, I wrote about the confluence of technicals that were reasons to buy the stock with conviction. That trade delivered big profits to those who listened as the stock rallied 50% twice, and the bulls had a lot to celebrate.
Unfortunately, Covid-19 came shortly after and it did not spare SNAP stock because it fell 60% before it bottomed. Nevertheless, it has since recovered almost all of the losses, which is astonishing to me. If the reopening process stalls and people do not go back to work, the Snapchat platform is better off because people would again have more time on their hands. The recession in this case is not going to negatively affect social media stocks like it, as it would impact a retail outfit for example.
Snap’s stock is not cheap, even if it carries a modest price-to-earnings ratio of 14. Its stock price is 14 times its total sales, which means it’s backed by a lot of hopium. Investors are giving it too much credit for its future growth. This alone is not a reason to short it, but it’s definitely a reason to be cautious and to find better entry points. Compare this to Facebook, which only sells at 9.4 times its sales. For another benchmark, consider that Amazon’s ratio is only 4 times its sales.
Technically, SNAP stock needs to hold the $16.3 zone. Otherwise, it risks filling half of the earnings gap, if not all. The last few weeks have formed a potentially bearish head-and-shoulders pattern and the neckline is just below the current price. From a trading perspective, the better idea is to either chase the breakout from $18.5 or buy the dip at or below $15 per share.
Twitter (TWTR)
Twitter made news again yesterday when it labeled President Donald Trump’s tweets as “potentially misleading.” The fallout from this is still unfolding as POTUS promised actions against the company. Consequently, this will add temporary pressure on TWTR stock until the dust settles over this matter.
Even before this new wrinkle, Twitter’s stock is my least favorite of the three social media stocks today. If you had asked me this on May 19, I would have said buy TWTR stock with two hands because it had broken out from $31 per share with room to run. However, on Wednesday, the bulls took a rest as it fell almost 3% when markets were very green. Headline pressure or not, near $35 per share, Twitter is definitely risky. There are sellers lurking there and it’s up to the bulls to prove that this time they won’t fall at that ledge.
That zone is resistance because of the February earnings pop-and-drop. Even though there is the temptation of an open gap in the chart, it will not be easy to fill it. The $36 ledge brought about a correction of 44% in March. Much of the damage was exacerbated by the virus, but now it is history in the charts, so the levels will matter again. On the way up, the bulls will need to deal with it.
A better entry point into TWTR stock would be closer to $31 per share. This is nothing against the company itself, in fact, it makes the rally even stronger. A stock needs time to transfer ownership into stronger hands so that the next time they tussle with resistance, they can take it out with force and target $44. Patience is key, so traders should wait for the trigger before chasing it. Either that or buy the dip for a better swing run from a lower and stronger base.
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. Join his live chat room for free here.
