Facebook Inc: FB Stock Tanks. Should You Buy This Dip?

Facebook Inc stock saw its second largest fall yesterday before finding support from the 50-day SMA.

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We at Amigobulls Inc have been bullish on Facebook Inc (NASDAQ:FB) stock for a while now. Facebook stock has been part of top stocks to buy portfolio which has outperformed the Nasdaq Composite by over 160%. Our faith in Facebook stock has paid off. FB stock has returned over 50% in the year-to-day period. Strong performance on the revenue and earnings front and general bullish sentiment in the market have been the main driver behind this bullish rally. In the third quarter, Facebook revenue came in at $10.33B, representing a YoY growth of 47.4% and conveniently beating analysts estimates by $490 million. EPS grew by 77% YoY to $1.58.

However, despite posting strong earnings results on most fronts during the third quarter, shares of Facebook Inc have remained subdued this month. Facebook stock has been flat since the earnings, before the steep correction. In yesterday’s trade, FB stock fell around 4%, the second largest correction in the stock this year. The only bigger fall this year was 4.4% dip on September 25th and Facebook stock had bounced back after that. Given that, should you buy the dip in Facebook stock?

Why FB stock fell?

In an unexpected market rout, $60 billion in market cap of the so-called ‘FANG’ group was wiped out yesterday. Shares of the ‘FANG’ group of tech companies that paced gains throughout the year saw their biggest fall in 22 months. The sell-off was not only restricted to ‘FANG’ stocks. The Nasdaq 100 Index fell as much as 2.2 percent while every stock in S&P 500 Semiconductor Index declined.

‘Rotation’ in sectors could be one of the main reasons for this decline. Most of the tech stocks have already very low effective tax rate, therefore they are unlikely to benefit much from the corporate tax cuts being proposed by the Congress. On the other hand industries like banking are likely to benefit the most from this tax cuts. Hence some investors are rotating their money from tech stocks to other industries. Consequently, big banks saw their stocks gain. Tech stocks had seen a similar correction in late September. They had bounced back after that and we can expect the same thing to happen in the next few trading sessions.

What technical charts are saying

In a bearish move, Moving Average Convergence Divergence indicator fell below the signal line indicating declining momentum in the stock. However, FB stock has found support from the 50-day moving average after the correction. The stock had fallen below the support line during the day, before bouncing back. 50-day SMA has provided strong support to Facebook shares since the beginning of the year. Yesterday’s price action which was accompanied by very high trading volume (highest since July end) indicates that the support from 50-day SMA remains strong. And if the stock manages to breach the support line then the next support level is 4 handles lower at the 100-day SMA. In all probability, the stock is unlikely to see any heavy declines in the coming days.

No major bullish triggers for Facebook stock.

While Facebook stock is likely to recover from the correction, it is unlikely to gain much for the remainder of the year. There are no major catalysts for the stock. In fact, the company is currently caught up in the Russia-ads controversy. The company has been co-operating with authorities and has taken several steps to curb misuse of its platform. Facebook CEO Mark Zuckerberg has vowed to bring “even higher standard of transparency than ads on TV or other media”. The company disabled the ability to target ads by excluding racial groups after a news report indicated that Facebook had failed to block discriminatory ads.

Facebook stock is also facing headwinds after it announced 45% to 60% jump in operating expenses next year which could seriously impact its profit margins. In the third quarter, Facebook’s operating profit margin expanded from 44% to 50% as the company was able to reign in its operating expenses.  Facebook stock will face headwinds in the short term. However, it has several long term growth drivers.

Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by 282%. If you’re a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.