Since its initial public offering in May 2012, Facebook (FB) remains a high-profile company that consistently captures the public’s imagination. A key member of the popular FAANG group of tech industry superstars (Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG)), Facebook’s stock has enjoyed an exceptionally strong and relatively smooth rise during the several years since its IPO.
Of course, the social media giant has not been exempt from problems. In fact, issues of serious concern have continued to build over the years with respect to Facebook’s handling of user privacy, fake news, the company’s implicit role in facilitating crime and terrorism, and a recent user data breach of massive proportions with British political consulting firm Cambridge Analytica at the center. Facebook experienced a severe backlash for inadvertently assisting Cambridge Analytic data mine, and exploit, millions of user profiles that may have been misused for political ads during the U.S. presidential election and in the U.K.’s Brexit referendum campaign.
Partly as a result of that personal data scandal, Facebook issued lower guidance for ad revenue in its July 2018 earnings report, which contributed to the company’s stock plummeting by over 20% at one point. This marked the biggest drop ever for the stock, as well as the largest loss of market value in the history of the U.S. stock market, at well more than $100 billion lost.
Despite these many troubles, though, a strong case might be made that the long-term outlook for the company may still be positive. Such a case will depend on how the company and its stock are analyzed.
With this guide, beginning investors should get a better idea about how to navigate through potential pitfalls and what to look for when considering investing in Facebook (FB), as well as similar stocks. Venturing into the stock market can be frightening, but every seasoned investor was once a beginner.
Before buying any stock, investors should perform due diligence to ensure that the company and stock have the potential to perform well. Due diligence can include different forms of analysis, the most basic being fundamental analysis and technical analysis. In fundamental analysis, the investor evaluates the intrinsic value of the stock by considering the overall economy, industry conditions, as well as the finances and management of the company. Technical analysis uses statistics that include the stock’s past prices and volume. Rather than be concerned with intrinsic value, technical analysis focuses on identifying patterns and trends in the stock’s current and future price movements.
Fundamentally, investors should research the company’s financials, found in its latest SEC filings. Other good sources of information include the company’s website, which will typically have an investor relations page. Financial sites like our own Investopedia also offer exceptionally useful, company-specific information.
To make a case for buying Facebook stock, the investor should analyze ad revenue growth, including mobile growth, usage trends, risks to operations, and outlook/guidance. Also look at trends for profit margins, total revenue, and monthly active users (MAU).
After doing one’s due diligence and feeling comfortable with the decision to buy the stock, the investor should determine if the current price is an appropriate entry point. Fundamental analysts calculate valuation metrics to determine if the stock is undervalued (when the entry price is most attractive) or overvalued (investors may want to wait for the price to come down before buying the stock). The Price-Earnings Ratio (P/E Ratio) is the most common valuation metric, but there are many others.
The P/E ratio for Facebook is 24.35, as of October 5, 2018. In isolation, that doesn’t tell the investor too much. However, if it’s compared to historical or industry P/E, it can determine how the stock is valued relative to its trends.
Another way to see if the stock is at a good entry point is to look at its historical stock chart trends. Technical analysis looks at various aspects of price and volume to see if the stock is at a desirable level for entry.
Facebook’s (FB) stock price trend since 2012 IPO. Source: TradingView
Once the investor determines that the stock is a good value at the current price, the next step is to calculate the number of shares to buy. If using an online brokerage account as the intermediary for the sale, there is usually a share calculator available. Otherwise, the calculation is:
Total Amount Desired to Invest / Price per Share = Number of Shares to Purchase
The current price per share, which for Facebook is $157.33 as of October 5, 2018, can be found on any financial website, such as Investopedia.com:
For Facebook, if the total purchase amount is $10,000 at a price per share of $173.74, the investor can buy:
$10,000 / $157.33 = 63 shares
The Bottom Line
Investing in Facebook, requires research and analysis. Investors should consider both the potential rewards and risks before buying stocks. Investing and trading are usually accomplished using a brokerage account. Those looking into brokers for trading may want to check out Investopedia’s list of the best online stock brokers.