Why Facebook Shares Could Fall 20%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Facebook Inc. (FB) stock has had a decent start to 2018, with shares rising by about 4.9 percent, but the stock has underperformed the broader Technology Select Sector SPDR ETF (XLK), which has jumped by nearly 8.9 percent. Based on an analysis of the stock's charts, signs are emerging that Facebook could be headed 10 percent lower, with the potential to fall by as much as 20 percent.

News from the weekend brought to light more issues at Facebook regarding user privacy. The stock has already struggled in 2018 amid investor concerns about rising costs due to security concerns at the social media giant. These worries about escalating expenses have been reflected in current analyst consensus estimates, with revenue projected to grow by nearly 36 percent in 2018, while earnings are expected to increase by 17 percent. (See also: Facebook Shares Fall After Data Leak Bombshell.)

FB data by YCharts

Resistance at $186

The technical chart is showing the stock has had a tough time rising above a resistance level around $186, and has failed to do so on three occasions since late February. 

The inability for the stock price to increase beyond $186 is also illustrated in its underperformance. Since February 8, shares of the Technology ETF have risen by approximately 12.2 percent, to Facebook's 7.9 percent. This is a sign that investors are looking for other investment opportunities away from Facebook. Should the stock be unable to rise above resistance at $186, a risk for steeper declines develops. 

A Fall To $166

The setup in the chart suggests shares could fall to roughly $166, a decline of about 10 percent, from the stock's close of $185 on Friday, March 16. That is where a technical support level and Facebook's long-term uptrend converge, suggesting a decline could occur by mid-April. 

The Potential For A 20 Percent Decline

Facebook has been in a rising trend since late 2013, when the stock was only in the mid-40's. It has since quadrupled in value. That makes the $166 price level extremely important to hold because should shares fall below $166, a further decline to $148 is possible. That's a drop of 20 percent from FB's closing price on March 16.

A Negative Trending RSI

The relative strength index (RSI) has also been trending lower since peaking in July of 2017, while shares have surged to multiple record highs. That could be seen as a bearish divergence indicator and a sign that Facebook has more declines to come. With the current RSI reading at 57, the stock still has a long way to go before reaching oversold levels (or a reading of 30 or lower). 

To Facebook's benefit, should shares fall to $166, the stock would be trading at only 18.9 times 2019 earnings estimates of $8.76 per share, well below the average one-year forward PE ratio of 20.8 for the top 25 holdings in the Technology ETF XLK. 

With the increasing scrutiny over privacy issues still in the very early stages, more pain may lay in store for Facebook's stock. But then again, FB's underperformance in 2018 has already been telling us that was a there is a significant risk in this stock.

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.