Facebook Investors: Here's the Dip to Buy

Facebook shares are under pressure, dropping into a buy-the-dip zone. Will support for the stock hold?
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Facebook  (FB) - Get Report shares are down more than 6% even after the social-media giant's earnings beat the estimates.

The Menlo Park, Calif., company reported fourth-quarter earnings of $2.56 a share, beating estimates by 3 cents. Revenue grew 25% to $21.08 billion, coming in $180 million ahead of expectations. Management also added $10 billion to its buyback program. 

Facebook's guidance, however, is apparently a disappointment. Management said it expected first-quarter revenue growth to decelerate by low- to mid-single digits vs. its fourth-quarter results. Still, that represents pretty solid growth.

Here's what the analysts have to say about the report. 

Let’s also not forget the strength of Facebook’s balance sheet: almost $54 billion in cash and short-term investments and total current assets of more than $66 billion.

In other words, Facebook has plenty of financial firepower, particularly against total current liabilities of roughly $15 billion and no long-term debt.

I don’t bring up the fundamentals for fun, but rather to emphasize that Facebook is a strong company with solid growth and reasonable valuation. 

For those reasons, surely investors would consider buying on the dip. The question becomes, will support hold? 

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Trading Facebook Stock

Daily chart of Facebook stock. 

Daily chart of Facebook stock. 

Investors will know very soon whether buying the dip in Facebook is a good idea. That’s as the shares drop to multiple layers of technical support.

First, the $203-to-$205 zone had been a notable layer of resistance from July to mid-December. After the shares broke out over resistance, this mark became support, showing that the bulls were in control. The stock then rallied up to $222.50, which became resistance.

Just above this $203-to-$205 zone is uptrend support, as well as the 50-day moving average at $207.61. With all these levels in play, FB stock should find buyers on this post-earnings dip.

If it doesn’t and the $203-to-$205 support zone fails to buoy it, then the bulls know the buy-the-dip trade is over. It will mean that Facebook stock still needs to consolidate, which will come either over time through choppy price action or more quickly via lower prices.

With volatility creeping back into the market, investors don’t want to take on plays that seem too risky. So if support fails to hold, Facebook investors must realize that sub-$200 could be on the way.

If support holds and Facebook shares rally, look to see if they can reclaim the 20-day moving average. Above puts $222.50 resistance back on the table.