Let me start by saying that I am a long time Facebook (NASDAQ:FB) bull especially on dips. Conversely, I am not a fan of chasing runaway rallies like what is happening with FB stock now. Following the herd, even under the best circumstances, is risky. Add to it that the current economic conditions are as bad as they’ve ever been thanks to the novel coronavirus, and equities are vulnerable here. I say this knowing that I am mostly a bullish investor, but it has to make sense.
I was a proponent of Facebook through all of the criticism from the past two years. But at these levels, it is not an obvious blind buy. I would much rather buy the dip. Here’s why.
Value Is Not a Problem Even If FB Stock Seems Expensive
Fundamentally, Facebook’s stock is not bloated. It is not cheap, either. But given that it is a growth equity delivering on its promises, I don’t need it to be cheap to own it. Growth companies overspend because they want to over-deliver. Wall Street is good at repricing the risk once they see that the growth phase is ending and this is not the case for Facebook yet. It remains a buy-the-dip stock in my book.
The future upside in its business is massive. Facebook has over 3 billion active users, so it would take a special kind of idiot to mess that potential. All the corrections FB stock went through from the privacy concerns were just noise. I wrote about buying the stock during the controversy. Recently, public opinion is going against the company again, and if it falls on that, I would buy the stock.
This time, the controversy is over censorship (or lack thereof) specific to U.S. President Donald Trump. Facebook is taking heat for choosing not to follow Twitter’s (NYSE:TWTR) lead into quasi-censorship. Last I checked, this is the United States of America, where if it’s legal, then you can say it. Punishing Facebook’s stock because of this would be ridiculous.
Buy-the-Dip With Confidence for Years to Come
Here’s a secret: Most Facebook users are outside of the U.S. Americans only make up maybe 5% the user base. Yes, the advertisers are here, but the eyeballs they are serving are abroad. This is all to say that investors should set feelings aside and just trade the basic math. With this much reach, FB stock is a buy for the long-term.
Today, I am arguing to go long in Facebook, but from a better base. Technically, the whole stock market is too high after Covid-19. The rally started from such depths that the snap back recovery overshot and it needs time to mature. As such, the bulls need a few dips to build a stronger base than this for more upside. This morning, the Nasdaq is plowing into more new highs in even Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA).
Find the Right Levels
The real breakout for Facebook’s stock started at $216 per share and the target from that is closer to $265. At this point, it has already filled about half of its total potential and it is finding difficulty breaking through the high near $241 per share. Investors looking for new investment entries better wait for a dip closer to $220, or chase it for a trade above a new high. I don’t see the need to panic buy it just because someone said so on TV.
Nowadays, retail investors have all the tools they need to do homework, use common sense and find proper entry points. If the intent is to own Facebook for at least five years, then a few dollars above or below the current price won’t matter much. Otherwise, it is worth it to hunt decent levels that are not vulnerable to immediate losses. Most of my caution toward the stock stems from my overall negative outlook on the economy, not Facebook specifically. Facebook is a bullish stock, and my suggestion today is to temper the immediate enthusiasm.
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.