Facebook Inc.’s (FB) stock has had a significant rebound in 2019, with the shares rising by over 48%, more than the S&P 500 gain of 26%. But shares have stalled and now appear to be reversing lower based on the technical chart. Even the stock’s valuation is at the upper end of its historical range since 2018 when regulatory fears became a concern for investors.
Further clouding the stock's future was news the Federal Trade Commission was considering an injunction against the company. According to reports, the directive would be to block Facebook from integrating the infrastructure of Instagram, WhatsApp, and Facebook. It creates just one more concern for investors to consider.
Facebook versus the S&P 500
The Technical Chart Points To A 7% Drop
The technical chart tells a bearish tale. The equity has now failed at resistance on two occasions at $203 since the end of November. It appears to indicate that the stock has formed a double top, a bearish reversal pattern. The real test for Facebook will come as the stock approaches support at $191. Should that level of support hold, then perhaps the stock can rebound back towards $203. However, should it drop below that support level, the shares could head lower to around $180. That would amount to a decline of about 7% from its price of roughly $194 on December 13.
Technical chart of Facebook
Unfortunately, there appears to be mounting evidence that the stock may fall. The relative strength index broke an uptrend at the beginning of December and is now trending lower. It indicates that momentum in the equity has turned from bullish to bearish. Another negative sign is that volume levels have risen sharply as the stock has declined. It is a sign that more sellers are entering the equity.
Facebook’s Valuation Is Elevated
If that weren’t enough, the stock’s valuation is currently at the upper end of its historical range since early 2018. Since privacy concerns became front and center in the spring of 2018, and investors’ attention has turned to fears of regulation, the stock has traded at a lower Price-to-Earnings multiple. Since that time, the equity’s one-year forward P/E ratio has been in a range of 17 to 23. As of December 13, the stock was trading at roughly 22 times one-year forward earnings estimates. Should that ratio revert to the middle of the range at 20, based on earnings estimates for 2020 of $9.05, the stock would trade for $181.
The historical PE ratio range would suggest that the stock is likely slightly overvalued presently. However, the stocks declines may be limited over the longer-term, should earnings estimates remain steady.
One-year forward P/E Ratio
Analysts Cut Estimates
One underlying issue that hasn’t escaped the company yet is the higher cost to combat all of these privacy concerns that have bubbled up. Analysts currently forecast earnings growth will decelerate in 2020 to approximately 7% from 11.7% in 2019. Meanwhile, earnings estimates for 2020 have dropped since the end of July from $9.26 per share.
The calendar may be rolling over in a couple of weeks ushering in a new year, and even a new decade, but the problems that have plagued Facebook’s since 2018 will be sure to follow. These concerns will likely continue to be a weight on the stock, potentially holding the shares back as investors re-rate the equity for added regulatory risks.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.
