(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Facebook Inc.'s (FB) stock has plunged in 2018, with shares down by more than 26% from their peak in July at almost $218. But the declines may not be over, because technical analysis suggests the stock will fall an extra 7% retesting the lows seen in March, from its current price around $160.65.
Option trades also suggest Facebook will fall by the start of early next year. This is a significant reversal from a few months ago when options traders were very bullish on the stock. The bearish sentiment for the stock comes as analysts slash estimates for the coming third-quarter. (For more, see also: Facebook Seen Rising 7% Short Term As Profits Jump.)
The technicals are flashing warning signs, as shares approach an essential level of technical support at $159.50. Should the stock fall below that support level, shares could fall to roughly $148.75. That would take the stock back to the lows last seen this spring.
The options expiring on January 18 suggest the stock will fall too. The number of open put contracts betting the stock falls, outnumbers the open call options betting shares rise, by more than 2 to 1 at the $160 strike price. The puts imply the stock drops by almost 7% to $150.
Earnings estimates for the coming third quarter have fallen since the company last reported results in July, dropping by 17% to $1.50 per share. Earnings for this quarter are forecast to decline by more than 5%, versus the third quarter a year ago.
Full-year earnings estimates have fallen too, by more than 6% to $7.31 per share. Earnings are expected to grow by 18% in 2018 down from prior forecasts calling for growth of 26%. The bigger problem is that earnings growth is likely to decelerate in the coming years to 14% in 2019 and 13% in 2020. (For more, see also: Facebook Stock May Fall More on Slashed Estimates.)
No Longer Cheap
Facebook's stock has fallen a long way from its highs, but for a good reason. Slowing revenue growth and higher cost are never an effective way to get a stock price higher. Until the company gives investors a reason to change their views, the path of least resistance for the stock may still be lower.
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.