Technical analysis: Facebook has been out of favour for a while, following a disappointing IPO that pushed into negative territory the P&L of the new shareholders. However, during the downturn a bullish pattern has formed. The stock trajectory has created a cup-and-handle that historically predicts a surge in price. The main reason behind the pattern lies in the bullish pressure that pulls the stock back to previous level and then needs some time to consolidate in order to form the basis (in terms of bullish volume) for a breakout.

$28 level is an important level for the stock, where both the 50-day and the 20-day moving average coincide. Climbing above this level, the stock has crossed over both of them.

Facebook held the $26 level and now needs to hold the $28.3 level to move higher.

Should the stock hold this level, we recommend buying the stock for a push toward $32. A tight stop-loss should be place around the $27 area.

Fundamental analysis: We had looked at Facebook at the time of the IPO and had developed certain estimates based on public data at the time. One year on, we can say that revenue growth was above our expectations ($5.1bn vs $4.7bn), while profitability, adjusting for the one-off charges mainly from stock-based compensation that vested during the IPO was also higher ($1.32bn non-GAAP net income vs our $1.26bn estimate).

While at first sight the rise in General and Admin costs as well as R&D costs look scary, these were largely driven by the one-off stock payments.  The stock has been largely penalised for this as the total effect from all the one-offs brought its profitability down from $1bn last year to $53m on a US GAAP basis. The stock is trading at 39x 2013 earnings and 29x 2014 earnings, which are unjustifiably low compared to peer LinkedIN that is trading at 131x and 85x respectively.

In general the three comps we used last year, namely Google, LinkedIN and Zynga, which on a blended basis are a good proxy for Facebook’s business, are trading at similar multiples as at the time of the IPO. The sector re-rating that followed after the IPO has been reversed and only Facebook remains with a penalised valuation. From a fundamental view, based on trading multiples, Facebook’s fair value seems to be between $33-$37 supporting the bullish technical analysis.



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