3 Reasons Why the Facebook Bubble is Ripe for a Huge 2020 Burst

Facebook stock performed exceptionally well 2019. But as the bulls grow more euphoric, the stage is set for a big correction in 2020.
Posted in: BusinessOp-ed
Published:
January 20, 2020 3:08 PM UTC
  • Libra’s potential success has already been priced in and it looks like the crypto will be a big letdown for the bulls.
  • Regulatory fears will start weighing heavier on the company. Antitrust agencies are already planning a tech probe of the Silicon Valley and a meaningful punishment is imminent.
  • Broader markets’ rally benefited Facebook but revenue growth is weakening.

After a great 2019, Facebook (NASDAQ:FB) bulls are expecting the stock to continue soaring. Some analysts covering the stock think it can rise to $300 levels in the coming years thanks to its much-awaited cryptocurrency Libra. The Mark Zuckerberg-led company had a great run in 2019, with the stock rising 56.6%, nearly doubling the rise of the S&P index. And Wall Street expects the rally to continue.

Facebook’s staggering gains in 2019.|Source: The Motley Fool

Wall Street analysts almost unanimously expect the stock to build on its 2019 run. 29 of the 33 analysts covering Facebook have a buy rating on the stock.

Only two analysts covering the stock have a ‘sell’ rating.| Source: TipRanks

 

Being a contrarian often pays when there’s extreme fear or greed in the markets. With so much bullishness around the stock, betting on Facebook to continue moving doesn’t make sense from a risk-to-reward perspective. As a result, the air will likely blow out of the Facebook-bubble in 2020.

Priced in Libra Hype Will be a Bulls’ Letdown

Many companies have witnessed staggering gains because of the cryptocurrency hype. Eastman Kodak went nuts in 2018 when it tripled in value solely because of the cryptocurrency hype. Unfortunately, it didn’t work out, and it witnessed a massive correction when the hype train got derailed.

Eastman Kodak reacts to crypto hype. | Source: Yahoo! Finance

When it comes to Libra, the hype gained momentum in 2019, when Mark Zuckerberg announced that it would be bringing the first version of the cryptocurrency in 2020. The stock climbed despite growing scrutiny from regulators.

Regulators have had understandable concerns trusting Facebook with personal data. When it comes to money, their doubts are going to grow tenfold. For this exact reason, pivotal companies like PayPal, Visa, Mastercard and eBay pulled out of the Libra cryptocurrency project. Swiss Finance Minister and President Ueli Maurer even said that the Libra project has failed before the launch.

Since Facebook is priced for perfection, markets will not take the potential news of Libra being cancelled or delayed positively, and the stock will likely take a big hit.

Antitrust Agencies have Sights set on Mark Zuckerberg

Last year, Facebook was fined $5 billion for selling private data to Cambridge Analytica. Since Facebook is a cash-rich company, the relatively small fine was perceived as a win by the markets. However, things can drastically change in 2020. With the US elections right around the corner, Facebook will attract even more scrutiny from regulators.

Some have already expressed concerns about the company’s dominance in the online ad market. A major tech probe on the Silicon Valley looms large and this time the regulators will look to impose a stricter punishment.

Facebook has fed off the Broader Markets Rally

The stock market had an excellent 2019 thanks to the incessant tweeting about trade deal by President Trump and stealth quantitative easing by the Federal Reserve. The broader markets rally pushed Facebook to new highs despite the company reporting a decline in revenue growth since Q4 in 2018.

The revenue growth declines, but the stock keeps soaring.| Source: The Motley Fool

 

The rising stock price despite slowing growth rate suggests that the rally has been driven by sentiments and has little to do with fundamentals. Given the threats surrounding Facebook’s latest cryptocurrency project and growing regulatory concerns, the sentiments can shift drastically. Amid all the bullishness around the stock, a sentiment shift can lead to a massive correction in 2020.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Last modified: January 22, 2020 11:38 PM UTC

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Ayush Singh @TraderBased

Ayush is a financial blogger and a swing trader. He has roughly four years of experience covering the U.S. stock market and has consistently featured on Tip Ranks' list of top performing bloggers. He is based out of Indore, India and is also managing the portfolios of several local retail clients. You can email him on Ayush.Singh93@outlook.com

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