Investopedia/Michael Kramer: Facebook Breaks Out, Could Rise 16% to $200

Facebook Breaks Out, Could Rise 16% to $200

By Michael Kramer | Updated October 9, 2017 — 2:00 PM EDT

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

Facebook Inc. (FB) shares are breaking out to the upside in a big way today, with the stock rising to over $174 a share. It could increase to nearly $200 by year-end, if not sooner, according to a combination of technical and fundamental analysis. The stock currently trades at about 21 times 2019 earnings, while earnings are estimated to grow by nearly 24 percent in 2019. That means Facebook shares are presently trading at a PEG ratio of less than one.

Shares of Facebook have been consolidating since the stock ran higher at the end of July, trading to nearly $175.50, after the company reported 2Q financial results on July 26. The social media giant's stock price stagnated for the rest of August and September, until October 9, when it finally showed signs of a significant technical breakout.

Based on the trading patterns and the fundamental growth story, the stock could rise 16 percent from its current price, should it achieve multiple expansion of 24 to 25 times 2019 earnings.
Shares Breakout Of Consolidation Range

Facebook shares have been trading sideways since the end of July, but as the chart above shows, the price has recently emerged from a symmetrical triangle. The trading pattern is bullish and seen as a continuation pattern, which means shares could rise from current levels. The stock's only technical resistance level could potentially come at $175.50.
Valuation Is Historical Cheap

FB Chart

FB data by YCharts

Facebook shares are currently trading at only 21 times 2019 consensus earnings estimates of $8.09, which is on the lower side of its historical valuation. Consensus estimates are modeling for earnings per share to grow by 24 percent in 2019, from $6.52 in 2018.

Adjusting for growth, Facebook is trading at PEG ratio of 0.90. For Facebook to trade at its growth rate, the PE ratio would have to rise to about 24, at which point Facebook would trade at roughly $195 a share.
Multiple Expansion

FB Chart

FB data by YCharts

But that multiple may have further room to rise because since bottoming in late July, analysts have started raising earnings estimates for the company. Since July 26, after Facebook reported second-quarter results, analysts have increased their EPS estimates by nearly $0.51, or 7 percent. Should the trend continue, the multiple could expand even further to 25, because the growth rate would rise as well.

Shares of Facebook appear to have been broken out of a nearly two-month slumber, and could be heading up from their current levels should the company remain on track and deliver solid third-quarter results. (See also: Why Analysts Still Love Facebook 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.
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