Facebook (NASDAQ:FB) is scheduled to report earnings on Wednesday, and the company is trading with a multiple that makes some investors think of the dotcom era, but the company is actually making money and growing EPS handsomely. In fact, earnings growth vs. the same quarter last year is expected to double, which makes that price earnings multiple far less daunting.
Without argument, Facebook is richly valued, and if the company hiccups at all, multiple contractions can come, but Facebook has beaten estimates three quarters in a row, EPS growth has been solid, and the company is looking for new ways to increase revenues and enhance shareholder value.
Reaching a mobile audience is a must, and if Facebook is able to serve mobile advertising without disrupting the user experience, it will probably turn out to be a landslide victory and shun the naysayers in this stock. Those who love Facebook are looking forward to that day.
Unfortunately, even though the recent results have been positive and the prospects are bright, one thing matters more than anything else when it comes to investing in stocks like this, and that's liquidity. In order for high-flying stocks like Facebook to continue to attract money, liquidity in the stock market must be free flowing enough so that aggressive dollars are willing to come to the table.
Recently, when Facebook and the other high-flyers fell aggressively, it was due almost solely to a collapse in the liquidity earmarked for aggressive investments by institutional investors. Those investors were making a clear transition to more conservative stocks like those in the Dow Jones industrial average, and out of shares of the higher beta stocks like Facebook.
However, in doing so, Facebook also fell from resistance all the way down to support as defined in our real time trading report for Facebook, and after testing support, Facebook has already begun to increase again. If longer-term support remains intact, our combined analysis for Facebook tells us to expect the stock to increase back to its longer-term resistance level again. That makes Facebook interesting, even in light of the liquidity concerns.
With earnings on the horizon, investors are sure to be interested in Facebook, but don't forget that the real net stimulus in the US economy officially dried up at the beginning of April, and if they continue to taper, the combined efforts of the U.S. treasury and the FOMC will begin to be a drain on liquidity instead. This will have an adverse impact on stocks that rely on excess liquidity to thrive, so the positive tone in Facebook today, and if one comes after earnings, may also be a short-lived phenomenon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee Jr. for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.