"Buy the dip" is one of my least favorite pieces of advice. While you are waiting for the dip to come a stock can appreciate to the point where, when the drop does come, it simply returns to where you could have bought it in the first place. It is generally far better to accept that you are unlikely to time a move perfectly and commit to the trade, knowing full well that at some point in the not too distant future, a correction is likely.
In the case of Facebook (FB), who is due to report earnings on Wednesday, however, it may be good advice, in part because of the proximity of that event, but also because, in the short term, the stock may be in a no win situation.
There comes a time in every growth stock's life when expectations begin to outpace possibility, and FB could well have reached that point. Analysts’ estimates are that FB will report EPS of $0.21 for the Quarter that ended in December, but even though that represents a huge 133% increase over the same Quarter last year, it isn't those expectations that worry me. Rather it is the unstated expectations of the market, where even as analysts have scrambled to keep up with Facebook's earnings growth, they have knocked it out of the park in each of the last two Quarters. Spectacular beats have become the norm.
This sets up the situation where even a good result can be seen in a negative light. Given a recent history of beating expectations by 44% and 30% in the last two releases, how do you think a Quarter that merely meets expectations will be received? Should that be the case, it is easy to picture all of the naysayers bringing up reports like this one, of teens deserting Facebook in droves, and a sharp drop ensuing. The prospect of teenagers fleeing Facebook is a worrying one for many, but I am not overly concerned.
The company has already shown, in its adaptation to the growth of mobile usage, that it can adapt to a changing market. Monetizing that shift to mobile has been a challenge for most, but FB has been proactive in trying to make it work for them. Last year’s acquisition of Parse saw them begin to branch out into the area of app construction and it will be that ability to derive revenue from sources related to their core business that will define the future of FB, rather than how many thirteen year olds use the social media service.
There is, of course, some degree of faith involved here. The long term prospects for the stock depend on the ability of the company to build other revenue sources, but this unassuming blog post (first brought to my attention by this Tom Taulli article at Investor Place) indicates to me that said ability is there.
If you are not a link clicker, Siriam Krishnan explains in the post that Facebook is in the process of developing a mobile ad network and is "running a small test to explore showing Facebook ads in third-party mobile apps." This could, as a commenter on the post says, be the "next billion dollar product." Even if it isn't, the fact that FB is pulling a Google (GOOG) and attempting to derive revenue from mobile in ways beyond its core product is a positive.
As the market in general has fallen over the last few days, FB has dropped with it and closed on Friday at $54.45. I am tempted to just recommend a buy right here, but, as I said, there would seem to be a situation where there is more chance that Wednesday's release will be seen in a negative light than that it will cause a pop.
Of course, if management takes the opportunity to announce a major development in the mobile ad network current pricing will look cheap by Thursday morning, but I think it is worth taking that chance. If that happens then I would be a buyer anyway, so the basic message is to buy after the release, no matter what.
There is no doubt that as time rolls on FB will face significant challenges. I have, in the past been somewhat dismissive of their long term prospects, even as I thought that the stock was worth buying. I remember when MySpace was all the rage and have a natural distrust of trendy stock. Now, though, I find the search for alternative revenue streams encouraging. If a mediocre earnings report this week causes the sellers to come out in force it may well be a great opportunity to "buy the dip."