This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stock Under $10 that he thinks could potentially double or triple in the next 6 to 12-months. See what he's trading today with a 14-day FREE pass.

Ponsi: Facebook's Move Isn't as Crazy as it Seems

Stocks in this article: FBTWTR

Facebook (FB) was slammed Wednesday on news that it would spend $2 billion to purchase virtual reality startup Oculus. The company immediately lost $6 billion in market capitalization -- or, as Doug Kass pointed out, the equivalent of three Oculi.

Still, I like this deal, and I like Facebook for the long haul. Facebook is using mostly stock for the Oculus purchase, with only $400 million of the total to be paid in cash, so it's a relatively low-risk transaction. I also liked last month's WhatsApp deal, and the market seemed to concur, as Facebook marched to an all-time high soon afterward.

However, if you have a shorter time frame in mind, you may want to avoid Facebook. Oculus could turn out to be a great investment, but right now it doesn't really matter. What does matter is that Facebook is a high-valuation company: Shares are trading at about 100x this year's earnings, and at 37x next year's estimated earnings. That is exactly the type of stock you don't want to own right now, regardless of how you feel about this deal. It's better to own cheap tech stocks such as Microsoft (MSFT) and Cisco Systems (CSCO), as I've explained here.

Facebook took it on the chin yesterday, plunging below its 50-day moving average (blue) for the first time this year.

What about Facebook rival Twitter (TWTR)? I still think Twitter's potential is underestimated by the market, and I still love it in the long term, but I'm not going to hang on to it as it falls. Twitter is trading at more than 200x next year's earnings estimates, so based on current market trends it is going lower. I'll certainly buy it back when this phase has passed, but there is no point in hanging on when highly valued stocks are so clearly out of favor.

Again, though, I think the Oculus deal could work well for Facebook. Remember this mantra: Facebook wins by getting everyone on its platform and keeping them there. Via the WhatsApp acquisition, Facebook users will be able to contact just about anyone at any time. If Facebook can provide a unique, immersive gaming experience to go along with that, it gives people another reason to go there -- particularly young people.  

Just as with the WhatsApp acquisition, Oculus seems aimed at the young users who've been losing interest in Facebook. Think of this from the perspective of a teenager, and you'll understand the appeal of both WhatsApp and Oculus. Adults might have a more difficult time understanding, because most of us don't spend our days chatting with friends and playing video games. But, with those two purchases, Facebook could solidify a position as the go-to website for young people around the world. Facebook is attempting to provide young people with the things they want the most in an attempt to get them on the platform and keep them there.

Ed Ponsi is the managing director of Barchetta Capital Management, an NFA-registered commodity trading advisory, and also provides educational services through EdPonsi.com. An experienced professional trader, Ponsi has advised a variety of hedge funds and institutional traders. Ed has appeared on CNBC more than 100 times and has been profiled in magazines such as "Technical Analysis of Stocks and Commodities" and "The Traders Journal." He is the author of Forex Patterns and Probabilities, a top-selling book on currency trading and The Ed Ponsi Forex Playbook, which was endorsed by Steve Hanke, professor of applied economics at The Johns Hopkins University. Ed's books have been published in English, Vietnamese, and simplified Chinese. At the time of publication, Ponsi had no positions in the stocks mentioned.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV

Markets

DOW 17,825.92 +10.98 0.06%
S&P 500 2,070.92 +3.89 0.19%
NASDAQ 4,782.4420 +24.19 0.51%

Our Tweets

Brokerage Partners

Top Rated Stocks Top Rated Funds Top Rated ETFs