(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Facebook Inc.’s (FB) stock has fallen by about 22% from its July highs after disclosing major data privacy breaches and giving weak guidance for future quarters. Now, the stock may recoup some of those losses and rebound by about 9% short term, based on technical analysis.
The longer-term outlook for Facebook is a different story. Analysts have slashed their estimates not only for the coming third quarter but the next two years with earnings growth expected to slow materially.
But the stock is strengthening, for the moment, despite those bearish fundamentals. It's breaking out after trending lower since July. There is a bullish technical pattern in the chart called a falling wedge, which is a reversal pattern. That suggests the stock will rise. Should the stock continue to increase as the pattern suggests, it could reach $186.10, an increase of over 9% from the current stock price of around $170.00. (See: Why Facebook Shares Could Fall 20%.)
Bullish momentum in the stock is also suggested by the relative strength index (RSI). The RSI stopped falling at an oversold level of around 30 in late July and has been starting to trend higher. That has occurred despite the stock's continuing declines in August and early September. This is known as a bullish divergence which also suggests the shares will rise.
The rebound in Facebook's stock is unlikely to last for one main reason. The fundamentals of the business present real challenges for investors. Analysts forecast that earnings for the third quarter will decline by over 5%, compared to earlier estimates of a 13% growth increase. (See: Facebook Stock Seen Falling to 2018 Low.)
Earnings estimates for all of 2018 also have been reduced significantly. As a result, price targets for the stock also have fallen. These negative fundamentals make it unlikely that Facebook's shares will advance longterm.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. 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. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.