Should Investors Buy Facebook Stock Now?

  • The most commonly cited reason for selling Facebook stock is driven by technical reasons.
  • Of course, when a stock is falling, it only seems like it will continue to fall lower.
  • However, it's dangerous to speculate and attempt a perfect entry. Many fall prey to buying low and selling even lower when attempting to time markets.
  • Furthermore, the upside at a $87 cost basis is still pretty compelling, and further deliberation may mean missing out on a longer-term rally.
  • The fundamentals are solid, and there could be further upside to headline EPS figures in the next fiscal year.
Facebook stock is a buy

Should investors be buyers of Facebook (NASDAQ:FB) stock? Yes, primarily because recent market selling isn't likely to be very sustainable due to the lack of broader macroeconomic data supporting any recession probabilities. Furthermore, the argument for selling Facebook these days seems to be more technical than fundamental.

Also see: Amigobulls' Facebook stock analysis video evaluating the company fundamentals.

For example, published an article stating the technical reasons for why the Facebook stock would fall further:

Just after reaching new all-time highs on heavy trade in mid-July, Facebook began to consolidate. The stock held in a tight range just above its July 17 breakout gap until the weak open on Aug. 21. This breakdown move confirmed a lower monthly high in August and a complete loss of the upside momentum that had carried shares to new highs three weeks earlier.

Of course, these are rather weak arguments to sell the stock, as it's one of the few high growth social media names that isn't trading at astronomical valuations. Generally speaking, I'm highly skeptical of the predictive value of technical analysis, especially when the technical analyst decides upon an arbitrary number for a price target just because the stock is downward trending.

FB technical analysis chart

Source: Facebook Stock Price data by Amigobulls

If you look at the chart, both the moving average convergence Divergence indicator and the relative strength index indicate that the stock is extremely oversold. Furthermore volume has declined, which tends to occur whenever a stock is about to experience a recovery in valuation. Typically volume drops whenever stocks are upward trending because sellers are very unwilling to sell and buyers have to pay a premium in order to make an entry. Eventually, this pattern reverses which is why high-volume days usually occur as a result of panic selling. Recoveries also tend to have high volume, but not to the extent of sell-offs. Over time, a recovery tends to form whenever volume trends downwards even as the price continues to trend upwards.

But even after reviewing the technical indicators for why the stock could potentially recover into a multi-weeklong rally, investors should be buying the stock simply because the entry point will lower their cost basis, and investing tends to work better when investors are building a sizable position regardless of whether or not the stock pulls back or continues to trend higher. Furthermore, it is very difficult to predict the exact bottom of a broader market correction, but generally speaking, the vast majority of market corrections tend to be less severe than 15%. During those periods, investors tend to generate the most return when they purchase stock and make very little effort to time perfect entries. In other words, being an opportunistic buyer at Dow 16,500 versus Dow 16,000 won't make much of a difference over the long haul. What matters is that investors simply add to their positions, especially if they haven't already sold the stock.

The worst thing an investor can do is to sell the stock near the bottom, and buy some shares on the way up. This tends to be common amongst investors that aren't very familiar to investing or are just starting out. While losses tend to be severe over the short run, it's important to remember why you bought a position in Facebook to begin with.

Did anything change about the fundamentals between June 2015 and August 2015?

No, but it is much cheaper, and if it was a good investment at $95 then I'm willing to assume that it's an even better opportunity at $88.

The stock trades at a price to earnings growth ratio of 3.2, and the forward twelve-month price-earnings multiple is 68.1. Now many of you would consider that to be a pretty high valuation but considering EPS grew by 85% from the prior year, and expectations for EPS growth is 32.9% next year, the stock is actually pretty inexpensive on a growth basis. Now, generally speaking, there is a lot of upside potential to next year's number because analysts tend to be very conservative when building out models beyond the current fiscal year. Furthermore, expectations are low for a company that has been able to sustain an annualized five-year earnings growth rate of 73.89%. Of course sustaining that growth rate off of a larger base of revenues and earnings will be difficult, but deceleration is likely to be much more gradual than whatever is modeled by sell-side analysts at the present time.

I anticipate that revenue growth will likely be in the mid-30 percentage range, but I also anticipate that profit margins will tick higher throughout the next fiscal year. While the company is going through a bit of an investment phase, I don't anticipate incremental investment into the product portfolio to reduce profitability in the next fiscal year. I anticipate non-GAAP operating margins in the high 50s or low 60s, and an effective tax rate of 35%. Therefore, my non-GAAP EPS estimate which compares to the headline figures is $3.25, versus consensus at $2.75. The growth rate will decelerate, but I anticipate it to decelerate to 57% year-over-year. Hence, there could be some significant upside either because of better-than-expected revenue or through cost management.

Therefore, I think selling Facebook stock right now would be very premature. Technical analysis does not identify market bottoms very effectively. Furthermore, I feel that the stock is cheap enough to acquire, as the lower cost basis will add meaningful capital appreciation assuming the stock's fundamentals continue to improve. Therefore, investors have a lot of upside but could also miss out for attempting to time the bottom.

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