As U.S.-China trade tensions escalate in the month of May and financial markets have traded lower, shares of digital advertising giant Facebook (NASDAQ:FB) have dropped, too. Month-to-date, FB stock is down 5%. Shares are now 6% off its 2019 highs.
The logic behind the selloff is pretty simple. If U.S. and China trade relations continue to worsen over the next several weeks and months, global-business confidence will suffer. When that confidence goes down, business spend and investment also tumbles. Plus, these pressures will compromise ad budgets. In turn, Facebook’s ad business slows.
Thus, fears of trade-related slowdowns account entirely for May’s weakness in Facebook stock.
But the trade war has to get really ugly before Facebook’s ad business is impacted. And it most likely won’t get that ugly because neither country wants to go there. Meanwhile, FB stock has a handful of fundamental catalysts in the pipeline which imply healthy growth for the foreseeable future. Additionally, shares are now closing in on a critical support level.
Overall, Facebook stock looks tasty on recent weakness. While the trade-related selloff is understandable, it’s overdone. Ultimately, FB stock will likely head substantially higher from here into the end of the year.
Trade Weakness Is Overdone With Facebook Stock
Part one of the bull thesis on Facebook stock is that the current selloff is overdone.
Facebook’s ad business is very strong and resilient. One of the largest advertisers in the world with arguably unprecedented targeting and reach, Facebook is too important a platform. Instead, advertisers and brands will cut ad spend on traditional TV, on Snap (NYSE:SNAP), on Twitter (NYSE:TWTR), on Pinterest (NYSE:PINS), and pretty much everywhere else before they cut spend on Facebook or Instagram. That’s why Facebook’s ad business continued to report robust revenue growth through the back-half of 2018 despite falling business confidence against the trade war’s backdrop.
Thus, things will have to get really bad in order for advertisers and brands to reduce their Facebook ad budgets.
In all likelihood, things just won’t devolve to that point. President Donald Trump has tied his success to the success of the stock market. The worse this trade war gets, the lower stocks go. Thus, Trump doesn’t want things to get worse.
Meanwhile, China’s economy correlates with its relationship with the U.S. When trade tensions are improving, China’s economy is improving, and vice versa. Thus, China also doesn’t want things to get worse.
But FB stock has shed more than 5% on trade-related concerns. Consequently, recent trade weakness is overstated, and this dip looks more like a buying opportunity than anything else.
A Turnaround Is Coming
Importantly, a convergence of favorable fundamentals and technical support may spark a big turnaround in Facebook stock.
On the fundamentals side, there are three things here: re-accelerated digital ad growth, new commerce growth, and margin expansion. On the re-accelerated digital ad growth side, Facebook’s digital ad growth rates slowed in 2018 as the company pivoted from tried-and-true News Feed ads, to nascent and unproven Stories ads.
But on the last conference call, management implied that can optimize Stories ads similar to how they approached News Feed ads. Thus, Stories pricing per ad will likely rise over the next few quarters. That will provide a huge tailwind which should help digital ad-growth rates speed back up.
Meanwhile, Facebook is pushing hard into the commerce front. This is especially true on Instagram, a platform made for visual e-shopping. As this commerce-growth initiative gains traction, analysts and investors will start to buy into the long-term growth potential of this vertical. FB stock will consequently head higher.
Lastly, big investments into safety and security spend hit Facebook’s margins hard in late 2018. But Facebook now spends more on safety and security than Twitter’s annual revenue. Thus, this uptick in expenditures is likely in the rear-view mirror. That along with higher growth rates translates to greater margins for the foreseeable future.
On the technicals side, FB stock is now closing in on its 50-day moving average. This moving average has provided consistent and meaningful support for shares throughout their entire 2019 rally. There’s no reason to believe this support won’t continue. As such, the equity looks due for a technical bounce, too.
Bottom Line on FB Stock
Facebook stock sold off with the rest of the market in 2019, but it shouldn’t have. Thus, investors would be wise to take advantage of this trade war dip in Facebook stock. It won’t last forever, and it will be replaced by a big rally toward $200.
As of this writing, Luke Lango was long FB and PINS.
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