Don’t Hit the ‘Dislike’ Button on FB Stock Now

Stocks to buy

Facebook (NASDAQ:FB) stock fell 7% after reporting earnings this week. At closing it was down 6%, shedding about $30 billion in market cap. It’s not like they delivered a terrible set of results; in fact, they beat forecasts.

FB Stock Drops on Report of DOJ Antitrust Probe

Source: TY Lim / Shutterstock.com

Wall Street decided that they didn’t beat them by a big enough margin, so they sold Facebook stock down in disappointment. The CFO-cautious comments fueled the fire as the main concerns centered around rate of user growth and a rise in costs.

The sellers are looking at the wrong metrics. This earnings report is not a reason to sell out of the stock in panic.

The main goal of any business is to make money. Facebook’s management grew sales 25% from this time last year. This is an amazing result given the size of the company. Instead, pundits are focusing on the growth of daily active users (DAU) and monthly active users (MAU).

They used cute acronyms like DAU and MAU as if they lend more heft to their arguments. Facebook reported 1.7 billion daily and 2.5 monthly active users. These are astonishing numbers so I expect the rate to slow.

Facebook has penetration into more than half of all smart phones on the planet. This makes their 8% MAU additions all that more impressive. From a reach perspective, Facebook has the attention of 2.5 billion users on a regular basis. And they are monetizing well across all their platforms.

The average revenue per user, or ARPU, for the Facebook platform is over $8. The others, which include Instagram and WhatsApp, are about $1 less. They are both impressive because Facebook has more than 10 times the DAUs than Twitter (NYSE:TWTR) or SnapChat (NYSE:SNAP).

Consensus Is Not Always Correct

The experts are not always right and they often lead investors astray. Sometimes the thesis for stocks like Facebook is easier than they make it out to be. For example, last year consensus was to sell Amazon (NASDAQ:AMZN) because “it was an investment year for the company.”

Last night investors bought Amazon stock back in droves. It spiked 11% on their earnings headline because management proved everyone wrong. Clearly the experts caused a lot of people a great opportunity as for selling last year at the lows. Now they will chase it after the fact.

Ironically, Amazon grew its sales 4% points less than Facebook did year over year. Investors might actually be repeating the Amazon mistake with Facebook.

This week critics also had issues with the expenses Facebook reported, which came in slightly hotter than expected. But this is OK for a growth company like this, because revenues matter more than the bottom line. Even then FB grew its bottom line 8% year-over-year.

This is why I always expect the short term reactions to earnings to always be binary. They beat expectations yet Wall Street demanded more. But that is where opportunities come from, when the expert opinions are wrong.

Last year among a sea of negativity, I wrote about a 20% upside opportunity in Facebook stock. From that time until the recent high, the rally measured 25%. I did not use any input from the so-called experts on the stock because simple logic sufficed back then, too.

FB Stock Has Support

Facebook Stock Chart

Source: Charts by TradingView

Simply stated, nothing has changed for FB stock. The investor thesis should also remain the same. Those long the stock can stay in it for the reason they took it to begin with. And if this selling continues there will be entry opportunities for new positions.

So far, Facebook managed to hold above its latest breakout neckline from December. As long as it holds above $200 per share, the breakout remains intact. This dip will shake the weak hands off to make for a better base for the next six months.

If they extend the selling to the yearly point-of-control near $185 per share, then it would make for a great swing trade with strong conviction.

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.

Products You May Like