Technical Opinion
Facebook has become so popular among internet users globally, and yet it is seen by analysts as a risky stock investment because it fails to meet even basic criteria. Analysts can have different points of view, but the basic idea is that Facebook lacks potential for growth and sustainable share in the marketplace. On the technical side things can look deceptive, as the stock has gained so much momentum in recent years. The question is now how will a company which is new, and has not stood the test of time, perform during bad times? Technical analysis is of no much use in this case, but it can show how far the stock in question has gone and the potential for short trades, using flexible instruments such as Put Options, as and when the right sell signals show up on the charts that is. Facebook has to pass some tough tests, especially market declining periods of low liquidity. This is the ultimate test for bubble stocks, and real bubble stocks tend to fall and never recover during such market declines. We believe that Facebook is an extremely risky, rising kind of bubble stock, utterly risky and unsuitable for long term investing. When bubble stocks will be put to the test, possible technical signs may come out of the blue, only days before the price crash will begin. Such signs may be divergences on the daily price chart, or even swing sell signals. At the time of writing this article Facebook’s stock is neutral, and the US stock market is in a kind of neutral trading mode. But also in a phase where liquidity in the US markets is getting less and less, hinting that a trigger for a bear market becomes more likely in the near future. When markets will go down, in bear market mode, which they inevitably do sooner or later some year, because it is the natural cycle of the economy which makes them decline in such bear phases, then Facebook’s stock will be triggered to decline, and it will never recover back to today’s high price levels again.
Facebook’s stock, in fundamental terms is worth zero! Wise investors simply believe that Facebook’s advertising-based revenue is too fragile and too small to support the stock price levels seen today, which are close to $100. Even by optimistic opinions a near $100 stock price is ridiculous and is not backed by market facts. There are some neutral to bearish indicator readings on the chart above, such as on the ADX indicator crossovers, these can be misleading too to technical traders, as the stock can perfectly follow markets higher for some time to come, proving these signals wrong. And possibly making traders think that the stock is fairly priced, the real test however will come during a bear market test, which can come at any time now. Moreover this stock, for its company size, is relatively thinly traded, due to not being heavily bought, and this at a time when the markets themselves are getting slowly but steadily thinner on liquidity, so one has to be even more selective with technical analysis.
Fundamental Opinion
Investors simply feel that the way Facebook generates revenue is fragile and not bear-market-proof. Therefore it stands to reason that a company that makes no money from consumers directly, but rather relies on third party advertising, will fall victim to bear market budget cuts and liquidity shortages, as soon as these show up. The same argument has been successfully applied in the past, to many other companies, wise investors believed these stocks were bubbles, either in part or 100%, and they were proven right when the bear market test crashed those stocks. Moreover, Facebook is not immune from competition and future innovation, sure Facebook is popular but so are so many of its competitors. This makes marketplace share limited among advertisers even in a good economy. The risk lies with balance sheet numbers such as earnings and revenue, these numbers can be so misleading and hide all kinds of weaknesses. As of September 2015 many analysts consider Facebook’s stock to be a hold and some fewer consider it to be a buy, but it is too risky and meaningless to stay long this stock. It is even meaningless to argue that this stock will outperform the market, it sure can do that in an up-trend… But this still tells us nothing about price resilience and how the stock will perform during a bear market test. So it is completely risky for long term and retirement investors to have funds invested in this stock. Rather, it makes better risk- reward sense to wait for the bear market test, and look to trade this stock on the way down instead, for short term gain. Valuation estimates for Facebook’s stock are practically zero, and that is even worse than many high tech bubble stocks of the late 90s. So in effect investors expecting to find long term value in Facebook are only being deceived by their analysts, in a kind of ‘fool’s gold’ investment scheme. Facebook has nothing powerful, nothing proprietary enough to propel the company to bigger success, and the marketplace simply doesn’t support today’s stock price levels even with today’s earnings and revenue figures, which in turn can also be misleading and manipulated by the CEO just to lure investors into believing otherwise.
