Shares of global internet giant Facebook (NASDAQ:) are tumbling into early August as broader financial markets are being pressured by escalating trade war and interest rate headwinds. Specifically, all the market has cared about in 2019 is the Fed and the U.S.-China trade war.
Yesterday’s blood bath turned the battle up to 11, and from the look of things this morning, world markets are extending the big losses seen in the wake of Washington calling China a currency manipulator.
Net net, the S&P 500 index has dropped more than 7% off all-time highs in a hurry. Facebook stock hasn’t been spared in the carnage. It’s down more than almost 9% from its late July highs.
Facebook stock dropping alongside the broader market makes sense. Facebook has exposure to both interest rate and trade war headwinds. Plus, the company has its own set of issues which aren’t negligible. As such, so long as these headwinds remain and so long as broader investor sentiment remains depressed, FB stock will remain in sell-off.
Improvement is on the Horizon
Fortunately for FB stock bulls, though, interest rate and trade war headwinds won’t stick around forever. Nor will the company’s other issues. Investor sentiment will improve into the end of the year, and the fundamentals create runway for the Facebook stock price to soar above $200 within the next few months.
As such, recent weakness in the shares is a long-term buying opportunity. Investors should, however, proceed with caution when buying the dip in Facebook stock. Things in the market are ugly right now. So, until Facebook hits a critical technical level (which doesn’t come into play until around $170), buying the dip in FB should be done in small pieces and with a great deal of caution.
The Fundamentals Underlying Facebook Remain Strong
Ignoring trade war and interest rate concerns for a minute, the core long-term fundamentals underlying Facebook stock remain highly favorable at the moment.
From an operational perspective, Facebook has moved past its 2019 . User growth rates have remained healthy in the high single-digit range. Revenue growth rates have stopped falling and are stabilizing in the mid-to-upper 20% range. Margins have likewise stopped tumbling, and are starting to stabilize in the 40% range.
Under the hood, consumers have basically declared that they generally don’t care about data privacy scandals, and remain addicted to Facebook’s ecosystem of digital products, particularly Instagram. Ad dollars follow engagement, and because consumers remain engaged in the Facebook ecosystem, ad dollars continue to flow in bulk into the Facebook ecosystem.
On top of this, Facebook is more deeply monetizing Messenger, WhatsApp, and Stories — which leads to more ad capacity across the whole ecosystem — at the same time that the company is pivoting into commerce. Facebook is also finally moving past huge data privacy investments in 2018, so spend growth is starting to moderate.
Putting all of that together, it’s pretty clear that Facebook is back. User growth trends will remain healthy as Facebook avoids churn through continued product usage expansion. Revenue growth will remain north of 15% for the foreseeable future as ad capacity grows and e-commerce revenue becomes a material driver. Margins will bounce back over the next few years as opex growth moderates against the backdrop of reinvigorated revenue growth.
Net net, the combination of 15%-plus revenue growth and favorable margin drivers makes $17.50 in EPS seem doable by 2025. Based on a historically average 20x forward multiple, that implies a fiscal 2024 price target of $350. Discounted back by 10% per year, that equates to a 2019 price target for Facebook stock of nearly $220.
Optics Will Improve Into The End of 2019
The optics surrounding Facebook stock will materially improve over the next few months. As they do, they will open up the runway for FB stock to climb above $200.
First, let’s talk market optics. Everyone is screaming “fire” about the yield curve inversion. But, the part of the yield curve that is inverted is the 10-year 3-month spread. That 3-month yield is in the “Fed Zone,” that is, it’s so short term that its almost entirely influenced by central bank policy.
President Trump has essentially put the Fed in a position where they have to cut rates now — probably multiple times — with trade tensions escalating. As such, the 3-month yield will likely fall significantly over the next few months, meaning the yield curve will normalize and steepen by the end of the year. As it does, yield curve inversion fears will disappear and bulls will re-take control of the market.
At the same time, Trump will likely pull the tariffs once rates are lower, since it seems like a major motivation for this new round of tariffs has been his desire to get the Fed to cut more. Broadly, then, financial market optics will improve dramatically from here, into the end of the year.
Second, let’s talk Facebook optics … which aren’t good right now nor have they been good for a long time. So, when market optics are bad, Facebook’s optics seem especially bad, and investors ditch Facebook stock in droves.
The flip-side of this, though, is that when market optics do improve, Facebook’s optics seem to improve by a bunch. As such, if market optics do improve substantially into the end of 2019, those improving optics will set the stage for a big rally in Facebook stock.
Technical Supports Comes Into Play Soon
Because things are ugly in the market right now, investors should proceed with caution when buying the dip in Facebook stock, and pay particular attention to key technical levels which could provide support for this free-fall stock.
Over the past six months, Facebook stock has regained its winning stride. As it has, the 200-day moving average has come back into play as a support level. In June, when FB stock was in free fall as a result of rising trade tensions, the stock bottomed and bounced just above its 200-day moving average.
Thus, the next big line of support here is the 200-day moving average. Right now, that moving average sits at $167. That isn’t too close to today’s $180 price tag.
Consequently, caution and patience are necessary here and now. Facebook stock will bounce back in a big way. But, it may have to fall further before it stages its big turnaround.
Bottom Line on FB Stock
Facebook stock is a good buy on this dip. Financial market optics and FB stock optics will improve dramatically into the end of the year, and as they do, they will create runway for the stock to run north of $200.
But, before things get better here, they will probably get worse. As such, buying the dip in Facebook stock here and now requires patience and caution.
As of this writing, Luke Lango was long FB.
The post appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.