It’s off to the races once again for Facebook Inc (FB). Tuesday’s new all-time closing high led many investors to question how much longer Facebook stock’s bull rally can continue, and while some say things may cool off in the near term, I would beg to differ.
Facebook and its fellow FANG buddies — Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX) and Alphabet Inc (GOOG, GOOGL) — led the market in 2015 and there’s no arguing that FB has been on fire this year as well. After getting off to a rough start in January (as did nearly every stock in the investing universe), a blowout fourth-quarter report sent the shares rocketing more than 22% higher to fresh all-time highs in early February.
With the shares trading just under those levels now, FB’s near 10% year-to-date return is easily beating the return of the overall market.
Now when a stock hits new highs, the initial and natural reaction of the masses is to assume that the stock is overvalued. And if you only take Facebook’s trailing price-to-earnings ratio into account, it may appear ready to correct. But the important thing to keep in mind here is that stocks do not move on past earnings results. They move based on the future outlook.
For the full year, earnings are expected to increase 38% over last year to $3.14 a share. Over the next five years, the Street expects Facebook stock to grow earnings by approximately 32% on an annual basis; and based on the consensus estimate of the more than 40 analysts covering the name, the company should earn $8.31 a share by 2020. These numbers are impressive on their own, but considering earnings for the S&P 500
are slated to decline for the fourth straight quarter, they’re just that much more extraordinary.
Yes, FB’s trailing P/E suggests that the stock is overvalued. But when you also take growth into consideration, you’re left with an attractive price/earnings-to-growth ratio of 1.15, which actually hints that this stock has much more room to run.
The Unstoppable Rise of Facebook Stock
Looking at the stock from a fundamental perspective, think about how many people you know who use Facebook regularly. It’s probably a lot because it’s in the lives of one in every seven people all around the world on a daily basis. Facebook’s flagship social media website currently has more than 1.5 billion users, and its other popular apps, Instagram and WhatsApp, boast an additional 400 million and 1 billion monthly active users, respectively. And as the company continues to streamline its costs, each of these users brings in more money to boost the bottom line.
The amount of information that Facebook has on us is priceless, especially to advertisers that can target a specific demographic.
From a technical perspective, the stock’s relative strength index tells us that FB is overbought in the short term. But stocks can continue to rally for days or even weeks once they enter those conditions. Facebook stock is up 11 of the last 12 trading sessions, so it will likely see a normal and healthy pullback at some point in the coming weeks. While the talking heads will try to convince you that the pullback is the beginning of the end of FB’s bull market, I suggest you ignore them.
Here you can see a weekly chart that shows the uptrend FB stock has been following over the last couple of years. Each of the dips you see is a buying opportunity, and any dips you see in the future will also be buying opportunities. It’s a perfect example of when to take advantage of near-term weakness.
To be honest, I wasn’t always such a bull on Facebook stock. Prior to its IPO and for months afterward, I was in the media telling investors to stay away from the stock until management had figured out how to monetize their mobile operations. Well, they did so successfully, and it was the catalyst that gave the current bull rally life.
Facebook stock has been moving higher for quite some time, and there’s nothing here to suggest that that trend is ready to end any time soon.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks, the ETF Bulletin and Co-Editor of Breakout Stocks.
