Why Facebook Stock (FB Stock) Jumped 6%
Facebook Inc (NASDAQ:FB) was buried under a series of scandals in the fourth quarter of 2016, but investors have returned to their bullish position on the internet giant. Facebook stock (FB stock) surged by six percent in the last five trading sessions, which all but erased its earlier losses.
What’s more is that FB stock could continue to skyrocket through 2017. Investors have exhausted their pessimism and appear willing to judge Facebook stock based on the company’s real-world performance.
We have always maintained that FB stock would skyrocket when the market begins to value it on fundamentals, so this development is encouraging.
In fact, it would be perfectly reasonable for Facebook stock cross $200.00 before the end of 2017. There are certainly enough catalysts to propel the stock, and the market appears to be entering a massive bull market. But more to the point, Facebook has several tailwinds that could help it outperform earnings expectations throughout the coming fiscal year.
Let me explain…
Estimates point to $5.15 in earnings per share this year. Although this reflects a 20% increase from the previous year, our research suggests it far too conservative. We believe that Facebook exaggerated its rising cost base and downplayed the effects of those investments in order to lower expectations. Why would they do that, you ask? Because they want lower expectations.
We’ve seen this before. When a company constantly outperforms expectations, analysts get into an expectations bidding war. Each of them tries to outdo the other with absurd and unachievable goals—targets that the company in question cannot possibly hit.
It’s like a subtle form of sabotage.
However, Facebook CEO Mark Zuckerberg is no fool. Like other smart business leaders, he keeps a bucket of cold water handy for when expectations start to heat up. All it takes is some downbeat forward guidance or bad press to make investors a little nervous. What this does is dampen the market’s optimism just enough so that FB stock can continue to outperform.
Insiders call it the “expectations game,” and Mark Zuckerberg just proved that he’s a pro at it. Don’t be fooled into thinking that Facebook stock is truly in retreat—the recent comeback shows that business fundamentals will always be more important than cosmetic difficulties.
For instance, Facebook is currently toying with the idea of midroll advertising. These type of ads play halfway through a video, thus allowing a company to charge much higher fees. If Facebook starts using these ads in its video content, it could potentially double its revenue. (Source: “Facebook Will Test Ads in the Middle of Videos,” Fortune, January 10, 2017.)
Its reality devices are also selling like water in a desert storm, and both “Instagram” and “Messenger” are starting to make money. All in all, Facebook has a bright future ahead. Now that the company has lowered expectations, the stage is set for FB stock to beat estimates once more.