Tough Year Ahead for Facebook (FB)

President Trump failed an attempt to eliminate section 230 social media protections when he signed the stimulus bill, giving up on a demand that repeal be included in the final language. However, Facebook, Inc. (FB) still faces a tough 2021, with state-level antitrust action alleging collusion with Alphabet Inc. (GOOG) to limit marketplace access and a Democratic administration not much friendlier than the conservative wing of the Republican Party.

Key Takeaways

  • Facebook stock is exhibiting declining relative strength into year end.
  • Many of Facebook's wounds are self-inflicted, with social media rivals zooming to new highs.
  • Antitrust actions at home and abroad could signal poor 2021 returns or a long-term top.
  • Wall Street has been ignoring growing headwinds, fixated on Facebook's ad revenue.

CEO Marc Zuckerberg has made few political friends in the past few years, first resisting attempts to filter fake news and then selectively applying filters that target right wing ideology. He's also making enemies in the tech arena, going to war with Dow component Apple, Inc. (AAPL) over iOS privacy changes, insisting that they will damage small business, even though the tech behemoth has destroyed thousands of small companies in the pursuit of bigger profits.

The European Union has become more aggressive than the United States in pursuing regulation and control of social media behavior, proposing the Digital Markets Act, which will enforce anti-competitive behavior with steep sanctions. Meanwhile, the U.S. Federal Trade Commission (FTC) has opened an investigation into how social media companies collect, use, and share data, raising the potential for Facebook's Alphabet connection to expand into much broader antitrust action and a potential break-up.

Facebook stock has performed poorly in recent months, even though the Nasdaq 100 index will end the year near an all-time high. The stock has lost 12% since topping out at $305 in August and could end 2020 close to a two-month low. Rival Twitter, Inc. (TWTR) has gained more than 31% over the same period, illustrating that Zuckerberg's troubles go well beyond political adversity directed at the social media industry.

Wall Street consensus on Facebook is asleep at the wheel when it comes to growing headwinds, maintaining a "Strong Buy" rating based upon 33 "Buy," 2 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of $205 to a Street-high $375, while the stock is set to open Monday's session more than $50 below the median $321 target. This humble placement can signal solid upside potential or a major disconnect, with analysts failing to heed negative catalysts.

Antitrust laws are statutes developed by governments to protect consumers from predatory business practices and ensure fair competition. They are applied to a wide range of questionable business activities, including market allocation, bid rigging, price fixing, and monopolies.

Facebook Daily Chart (2018 – 2020)

Chart showing the share price performance of Facebook, Inc. (FB)

The stock completed a second trip into 2018 resistance near $220 in May 2020 and broke out, testing new support in July. It then took off in a trend wave, adding about 75 points into August's all-time high at $304.67. A quick decline into the 50-day exponential moving average (EMA) above $240 completed a trading range that remains in force as we enter the last week of 2020. Two attempts to mount the range midpoint have failed, while accumulation readings have now dropped to three-month lows.

The stock has been trading below the 50-day EMA for the past five sessions, exhibiting declining relative strength that raises the potential for a test at range support and the 200-day EMA in the $240s in January. Meanwhile, the monthly stochastic oscillator is now engaged in a full-blown sell cycle that predicts weakness straight through the first quarter, potentially exposing a trip into breakout support near $220.

Relative strength is a technique used in momentum investing and identifying value stocks. It consists of investing in securities that have performed well relative to their market or benchmark.

The Bottom Line

Facebook faces growing headwinds that could translate into weak 2021 returns or a long-term top.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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