Facebook Stock (FB): A Case For $200. But Caution Warranted

Facebook Inc (NASDAQ:FB) stock has underperformed the market and headwinds remain.

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Tech stocks are in a firm bear grip right now. Nasdaq Composite was down again on Monday. Tech stocks like Facebook Inc (NASDAQ:FB) and NVIDIA continued to be pummeled lower. While Facebook stock is still up by 50% for the year, FB stock has not gone anywhere in the last three months. Does this suggest a stagnation in Facebook stock? Well, there is no doubt that the social media giant is facing strong headwinds. And the rotation in the stock market will keep the pressure on the FB stock in the short term.

FB stock is testing 100-day moving average support.

Last Wednesday, Facebook stock had tanked by 4%, its second largest correction this year. However, the stock had found support from the 50-day SMA, a crucial support line. 50-day SMA has provided strong support to FB stock over the course of this year. We had expected the support to remain, and it did, for a couple of days. However, the continued sell-off in the tech sector pushed FB stock below the crucial 50-day SMA. Not only that, Facebook stock is also testing its 100-day SMA support line. FB shares managed to close below the 100-day moving average line for the first time since early January. In another bearish move, Moving Average Convergence Divergence indicator crossed below the zero line indicating bearish momentum.

New tax law is causing a dip in tech stocks.

The main reason behind this correction is the ongoing rotation in the stock market due to the new tax code which is proposing a heavy reduction in corporate tax cuts and not related to fundamentals of the company, which is a positive. Markets expect the new tax code to benefit sectors like finance which has higher effective tax rate currently than tech stocks which have a low effective tax rate. In the previous quarter, Facebook’s effective tax rate was 10% against the statutory tax rate of 30%. Given this, investors are churning money from the tech sector to other companies. This rotation is the main reason behind the divergence in Dow and Nasdaq. While Nasdaq Composite has been correcting over the past week, Dow has been hitting new highs.

Headwinds remain.

So, while the current decline in FB stock is due to systemic reasons, the stock also has been facing strong headwinds from company related factors. The social media giant is embroiled in controversy surrounding Russian interference in the U.S elections. The company is also facing pressure from European authorities for alleged tax avoidance. The recent announcement by the company warning 45% to 60% jump in operating expenses next year which could seriously impact its profit margins also didn’t go overly well with investors. Add to it, Facebook stock has no immediate catalyst. All these factors will keep a check on Facebook stock in the next few months. This is not to say that Facebook stock is a bad investment, especially in the long term.

Analysts remain bullish on Facebook stock.

Despite the current bearish sentiment, FB stock recently received bullish commentary from several analysts. Morgan Stanley recently reiterated its overbought rating on FB shares with a target price of $200 while another analyst named Facebook stock its top pick in the internet sector with a price target of $225 and MKM Partners raised their price target for Facebook stock from $200 to $240. So what is keeping these analysts bullish on Facebook stock?

The recent rally in Facebook stock has been driven by improving fundamentals and the general bullish sentiment in the market. 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. Facebook’s revenue has grown at a CAGR of 51% over the last five years. This strong revenue growth along with impressive profit margins is the reason why Facebook stock sports rich valuation multiples. And analysts are betting that despite the headwinds the social media giant will be able to grow its revenue at a rapid pace helped by Instagram and other investments.

According to one analyst, the company will be one of the biggest beneficiaries of AI. According to JP Morgan, AI-related hardware, software and services market will grow to $58 billion by 2021 from roughly $12 billion this year. FB is working on applying computer vision techniques to organize content and provide the ability to classify live videos in real time.

Then there is videos. Company CEO Mark Zuckerberg has identified video as the next big trend. Facebook recently launched its ‘Watch’ platform with the aim of making watching videos a social experience. “Watch” will encourage users to not only watch content but also discuss it. News reports indicate that the company could spend up to $1 billion on the development and producing original content. While some expect this to be a drag on companies bottom line, Morgan Stanley believes the company could break even on its video investment in 2018. “We Model $565 million of ’18 Watch Video Revenue, $400mn of Video Spend.” it said in a note, which will be a positive for bottom line especially given that operating expenses are likely to see a massive increase next year. Given that digital ad spend is expected to grow at a CAGR of around 12% from $72 billion in 2016 to $113.18 billion in 2020, compared to 2.2% growth TV ad spend is likely to register, Facebook expects videos to be a significant growth driver in the medium term. The company has also started monetizing its WhatsApp and Messenger platforms.

We remain bullish on Facebook stock in the long run. Facebook stock is part of Amigobulls top stocks to buy portfolio from tech sector which has outperformed the Nasdaq by 140%. Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by a whopping 281%. 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.