Facebook investors had a very rough ride in 2018. After hitting an all-time high of $218, the share price crumbled all the way down to $123 – producing a share price crash of over 40%. Investors ran for the exits over concerns about negative user growth, a raft of ongoing privacy and security issues, and a CEO who was losing goodwill on a near-daily basis.
Investor fear had set in.
However, while legendary investor Warren Buffett has no shares in Facebook, his advice to ‘be fearful when others are greedy’ has helped Facebook shares soar higher in 2019 as investors seemingly pile back into the company. In fact, in the month of January alone the stock closed higher nearly 30% from where it opened.
So is it now time to like Facebook again? Let’s take a look…
Why Were Investors Fleeing From Facebook?
Facebook – the world’s biggest social networking platform – became a publicly traded company in May 2012. The company was loved by Wall Street and fund managers alike and experienced steady growth for quite a few years. However, in July 2018 it all came crumbling down as the chart below shows:
Source: Admiral Markets MT5 Supreme Edition, Facebook, Weekly – Data range: from February 8, 2015, to February 5, 2019, accessed on February 5, 2019, at 6:23pm GMT. – Please note: Past performance is not a reliable indicator of future results.
On this day, the stock sank 20% lower in its worst-ever one day decline – wiping off $120 billion of value from its books. The trigger was a warning from the company that revenue growth would take a hit.
Since then, the company was hit with a raft of bad news and exposés which helped fuel the share price decline. The Cambridge Analytica scandal, data breaches, accusations of unethical behaviour, and political manipulation saw even more investors run for the exits.
So why has Facebook stock been so loved – thus far – in 2019? Where is the stock price going next? Let’s investigate…
Investors Start to Like Facebook’s 40% Profit Figures
In Facebook’s January earnings call, the company reported a total profit of $22.1 billion for 2018. That’s up 39% from its profit in 2017. Despite all the negativity and fear around the company – Facebook seems to be thriving.
The stock jumped nearly 11% higher on the earnings and revenue beat. While the company reported flat user growth in the United States and Canada, they saw strong growth in India, Indonesia and the Philippines. In fact, the social media behemoth said that 2.32 billion people logged into its site at least once a month last year.
The impressive earnings release also attracted the attention of leading analysts. On January 31, Goldman Sachs initiated a buy rating on the stock and increased their price target to $195 from $150. In fact, over thirty-four different analysts listed buy ratings on the stock. But what do the technical charts say, and what opportunities lie ahead?
Facebook’s Long-Term Trading View
Facebook’s share price stayed above its 50 period exponential moving average between 2015 and mid-July 2018. This indicated a bullish scenario where buyers remained in control, as the chart below shows:
Source: Admiral Markets MT5 Supreme Edition, Facebook, Weekly – Data range: from January 25, 2015, to February 5, 2019, accessed on February 5, 2019, at 7:15pm GMT. – Please note: Past performance is not a reliable indicator of future results.
After falling below the moving average for the second half of 2018, shares in Facebook are now trading back on the upside. This suggests that buyers could regain control of the share price yet again. While the long term technical picture shows a bullish bias, what do the fundamentals tell us?
Fundamental traders may be interested to know that:
- Facebook is growing in user numbers in overseas emerging markets.
- The company’s average revenue per user grew 18% annually in overseas emerging markets.
- There is a commitment from management to grow their powerhouse advertising platform.
- The company has over $40 billion in free cash for stock buybacks or aggressive expansion.
Facebook’s Short-Term Trading View
Of forty-four different analysts’ price targets, the highest is $275 and the lowest is at $120, providing a median price target of $193. This provides an interesting bias for short term traders, as the chart below shows:
Source: Admiral Markets MT5 Supreme Edition, Facebook, Weekly – Data range: from April 19, 2018, to February 5, 2019, accessed on February 5, 2019, at 7:28pm GMT. – Please note: Past performance is not a reliable indicator of future results.
On the Facebook daily chart, the share price currently trades above its 50 period exponential moving average (as shown by the red line) providing a bullish bias for short term traders. With an analyst median price target of $193, there is plenty of possible upside.
Traders may consider using simple price action based strategies for possible entry, stop loss, and target levels. For example, a popular price action pattern is a bullish pin bar reversal. This is when a bar makes a new daily low, but then trades all the way back up and closes the day in the upper half of the bar.
On January 24 2019, Facebook’s stock price formed a bullish pin bar reversal. Traders could have entered a buy order on the high of this bar at $146.41. A stop loss could have been placed on the low of the bar at $142.51.
With a 100 lot, or 100 share, position size, this would result in a $390 loss if the entry and then stop loss was triggered. However, in this instance, the share price continued to move higher. Targeting the next major resistance level at $169.30 would have resulted in a profit of $2,289 on January 31.
With a very bullish start to 2019, trading Facebook shares looks set to be a hot play on Wall Street this year. How will you be trading?
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