The Under-Performance Of Facebook

The shellacking of Facebook (FB) for over a week of scandal-ridden headlines has created that rare beast in the jungle of tech stocks: a “value” play. Facebook has a trailing P/E of 29.6 and a forward P/E of 17.9. Quarterly earnings growth is running at 19.6% year-over-year. According to briefing.com year-over-year revenue growth has run from 44% to 49% for each of the last 4 quarters. This looks like a deal…except of course FB has become “cheap(er)” for a reason.

When I stubbornly targeted Facebook for accumulation into the panic as the headlines broke about the abuse of user data by Cambridge Analytics, I positioned myself for a rally starting by the early part of the last week of March (the coming week). Instead, FB now looks poised for more imminent losses as a broken stock.

Facebook (FB) became a broken stock by confirming a breakdown below its uptrending 200DMA Source: FreeStockCharts.com

The above chart shows how FB was on the edge of conquering resistance at its 50MDA when the scandal from Cambridge Analytics broke and gapped the stock back below its 50DMA. The uptrending 200DMA also survived two previous tests. Even after the first day of post-scandal selling, buyers managed to take FB back to its 200DMA support. For the next 4 trading days buyers tried to defend FB’s stock; each attempt took a slightly different form. Each day, the end result was the same: closes at or below the lower-Bollinger Band (BB). Friday’s 3.3% loss took FB to an 8-month low and closed the stock further below its lower-BB than its has closed in a very long time.

I tried to remain optimistic that my rebound scenario would play out. Wednesday’s gain in particular fooled me as FB briefly peered over its 200DMA. It never occurred to me at that time to start buying puts as a hedge for my position.

Yet, perhaps the biggest thing I missed was Facebook’s long streak of under-performance relative to its other large cap tech peers in the PowerShares QQQ ETF (QQQ). Facebook’s relative performance peaked in July, 2017 and has declined ever since. Facebook’s relative performance has returned to its early 2017 level.