Facebook Inc: “Double Threat” Could Send FB Stock Soaring

fb stockFacebook Inc: “Double Threat” Could Send FB Stock Soaring

Facebook Inc (NASDAQ:FB) stock is just one of the many tickers that got killed after the Brexit news. In the past two trading sessions, Facebook stock fell 5.3%. However, unlike many other tickers, Facebook has two factors that could send its share price back up sooner than you think.

Allow me to explain…

Facebook Stock Extremely Oversold

First up, as Facebook shares plunged, one technical indicator is saying that the stock has entered extremely oversold territory.

I’m looking at the relative strength index (RSI). It is based on the closing prices of a recent trading period and compares the magnitude of recent gains to recent losses to measure the momentum in a stock.

The RSI ranges from zero to 100. A stock is considered to be overbought once the RSI approaches 70 and oversold if the RSI approaches 30. Right now, the 14-day RSI of Facebook stock is at 29.72, indicating that FB shares are extremely oversold.

Note that for a solid company like Facebook, the RSI cannot stay on the floor forever. Last time Facebook stock’s RSI dipped below 30 was in August 2015, when the entire stock market was crashing (similar to what’s happening right now). In the two months following that, Facebook shares climbed more than 25%.

Fb stock chart

Chart courtesy of www.StockCharts.com

Connecting Businesses with Consumers

Then there’s Facebook’s unique role in connecting businesses with consumers.

As the biggest online social network in the world, Facebook’s main revenue source is advertising. In the first quarter of 2016, the company generated $5.2 billion of ad revenue, representing 96.6% of its total revenue. (Source: “Facebook Q1 2016 Results,” Facebook Inc, April 27, 2016.)

The question is as Facebook’s userbase reaches a mind-boggling 1.65 billion, how can the company grow any further?

This time, the answer can be found in businesses and, in particular, local businesses.

To give you an idea of how important a platform Facebook has become to local businesses, here are some numbers. Globally, 50 million small businesses have Facebook pages. (Source: “Facebook Hits 100M Hours of Video Watched a Day, 1B Users on Groups, 80M on FB Lite,” TechCrunch, January 27, 2016.) In the U.S., 41% of small businesses use Facebook. (Source: “Small Businesses Are So-So about Social,” eMarketer, April 14, 2015.) Moreover, more than 30 million small businesses update their Facebook pages at least once a month. (Source: “Facebook Fit: 30M SMB Pages, 19M Run Via Mobile,” Adweek, June 3, 2014.)

When a platform amassed billions of consumers and tens of millions of businesses, it has huge monetizing potential. By March 2016, Facebook reached three million businesses who are active advertisers, which represented a 50% increase over the previous year. (Source: “Facebook: Active Advertisers Jump to 3 Million,” CNBC, March 2, 2016.)

Note that among the three million active advertisers, the vast majority are small businesses. One of the reasons why small businesses are embracing Facebook is that the platform offers advertising tools to target local consumers.

For instance, if you were to advertise your local business on Facebook, you can target your ad according to location, age, and gender. Also, in order to help advertisers track whether the ad works, Facebook recently introduced the interactive map feature. After including the interactive map, businesses can track how many users who saw the ad and actually visited the physical store. (Source: “Facebook’s New Ads Will Track Which Stores You Visit,” Recode, June 14, 2016.)

However, note that despite Facebook’s huge advertising business, there is still plenty of room to grow. The company said that 35% of small businesses in the U.S. are yet to have an online presence.

Also, its three million active advertisers are only a small percentage of the 50 million businesses that have Facebook pages. If more advertisers find success through Facebook and the word gets around, more could join. If the company adds even a small percentage of its tens of millions of potential advertisers, it could easily see a few billion dollars of extra revenue.

The Bottom Line on Facebook Stock

Right now, Facebook stock is down like most of its peers in the Internet industry. But given the extremely oversold environment and the company’s growing advertising business, a bounce in FB stock could come soon.