On May 21, Facebook (NASDAQ:FB) hit an all-time high at $237.20. Now long-term investors are rightfully wondering whether it’s time to take some money off the table or whether they should stay invested in FB stock.
Before too long, I expect Facebook’s stock to make a move to $300. However, in the coming weeks there may be some short-term profit taking in the shares, which would give long-term investors a better entry point.
Advertising Revenue Keeps Growing
In late April, Facebook released financial results for the first quarter ended March 31. Revenue came at $17.44 billion, a 17% increase year over year. Earnings per share were $1.71, compared to 85 cents in Q1 2019.
Despite the various challenges the novel coronavirus had presented for the ad businesses, investors were pleased with the results. Since then, FB stock is up close to 20%.
The company’s flagship platform reached had an 11% YoY increase to its daily active users (DAUs) for March 2020 (a total of 1.73 billion users on average). That number is around 25% of the global population. It is important to underline how big that number is. Users are not only individuals, but also institutions, businesses of all sizes and organizations, including workplaces, community centers, schools and even places of worship.
I expect Facebook, like Google, to stay as the choice of senior ad buyers. After all, they hold extensive demographic data that enables advertisers to target audiences effectively.
For example, a recent Canada-based study on the impact and cost-effectiveness of paid ads for recruitment concludes that “FB ads were efficient and cost-effective in broad dissemination of trial information.”
Put another way, given the strength of the business model and the daily global reach of the group, advertisers cannot leave Facebook. Yes, there may be volatility in revenue numbers that may even fall every now and then. But eventually, Facebook succeeds to attract advertisers who are willing to spend.
On a final note, Facebook has another revenue segment, “Other.” It includes various efforts, such as the Portal and Oculus hardware business. The revenue is still relatively small at $297 million. But it has grown 80% YoY. So there may be more to come in this segment in future quarters.
FB Stock Will Likely Benefit from Ecommerce
The most recent price spike in FB stock mainly came on the back of the news that the group is launching Facebook Shops. Small businesses can now create online storefronts both on Facebook and Instagram.
And this push into ecommerce through Shops could become another game changer for the group. At this point, businesses can set up an ecommerce site for free. Facebook will monetize it mainly through ads. It will also receive fees if a seller uses Facebook’s checkout system, which will be optional.
Wall Street was quick to put a seal of approval on the new feature. For example, according to Deutsche Bank, Shops could add an additional revenue of $30 billion per year.
A similar research note released in April 2019 had highlighted that Instagram’s e-commerce function “Checkout With Instagram” could add an annual revenue of $10 billion.
Therefore potential FB investors may want to keep an eye on the developments in ecommerce. We are now beginning to see a more focused approach by management to capitalize on ecommerce. As personal and professional lives move increasingly online, I am willing to bet that FB stock will further benefit from these efforts.
What Could Derail Facebook in the Short-Term?
From a fundamental perspective, I expect to see the shares of the social networking specialist to make new highs in the coming years, if not quarters.
However, regular InvestorPlace readers would be well familiar with the fact that Facebook is a momentum stock. Therefore, short-term traders are always part of the moves behind FB stock.
On March 18, 2020, the stock saw a 52-week low of $137.10. Since then, the shares are up over 70%. And year-to-date, they are up over 15%.
If you are an investor who also follows technical charts, you may be interested to know that, FB stock is now rather overbought. And the charts would urge caution. As a result of the impressive 2020 price gains, short-term momentum indicators, which describe the speed at which prices move over a given period, have now become over-extended. The same can be said of many other stocks, especially of tech shares.
So there will likely be a pullback in the markets in near future. The first level for FB stock would likely be $210 and in case of further decline, then $195.
If you are an investor with paper profits, you may want to realize some of the gains. Alternatively, depending on your risk/return profile, you may want to ride the potential wave.
That said, if you already own shares of Facebook, you may also consider hedging your position with at-the-money (ATM) covered calls with July 17 expiry.
The Bottom Line on Facebook
Amid the uncertainty of the global pandemic, FB stock has been one of this year’s strongest investments. And it may not be too long before it hits $300. However, in the coming weeks, there will likely be profit taking in Facebook. But such a drop would offer better entry points to new investors.
As long as Facebook’s fundamental metrics are moving in the right direction, long-term investors should not pay too much attention to the daily volatility in the stock price.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.