Facebook Inc: How to Win the Momentum Game

After a week-long decline due to a sell-off of "momentum" stocks, is the social media king an even better investment opportunity now?

Apr 7, 2014 at 10:45AM

After dropping over 5% last week alone, it'd be understandable if Facebook (NASDAQ:FB) shareholders were a bit edgy as we get another week of trading under way. In what many market pundits have referred to as a correction in momentum stocks, Facebook and its wannabe competitor Twitter (NYSE:TWTR), among others, took quite a beating as the sell-off in tech stocks gathered steam.

The question now is if the recent share price drop is an opportunity, or the beginning of a long-term decline in tech stocks in general, and social media shares in particular? Also, should Facebook be lumped into the "momentum" grab bag at all? Facebook has a consistent track record of stellar results, which are likely to continue, whereas Twitter offers little more than a few months of a ridiculous valuation and declining prospects in several areas. That sound you hear Facebook fans? That's opportunity knocking.

Trading on momentum
In many ways, so-called momentum stocks demonstrate all that's wrong with the market, and the mind-set of too many an investors. Investing based on current trends, either up or down, is what momentum trading is all about. Though any industry is susceptible to trading momentum, high-growth industries like technology see more than its fair share of wave-riders.

From its beginning as a publically traded entity in Nov. of last year, Twitter has served as the poster child for what the impact of market sentiment, and the trading momentum that follows, can have. Though it's only been a few months, it's easy to forget that Twitter was initially priced at $26 a share, already on the high-end of pre-IPO estimates. It proceeded to close its first day just shy of $45 a share, and has risen to over $70 a share since, before coming back down to earth.

Why such a rush on Twitter shares? Initially, bullish analysts pointed to Twitter's quickly growing user base and opportunities to monetize its service, much like Facebook was able to. But as Twitter began inching its way up the valuation chain, it became apparent it was simply enjoying market momentum, and nothing else.

That's one of the primary downsides surrounding momentum investing: companies on the periphery, let alone in the same industry like Facebook and Twitter, get swept up in all that momentum, whether its deserved, or not. As Facebook shareholders learned last week, the same, "guilty by association" concept applies on the way down, too.

Playing the momentum game
Right or wrong, momentum and trends will continue to play a part in the markets, that isn't going to change. And that's just fine, or should be, for mid to long-term Foolish investors: Facebook is an ideal example of why.

Though its share price was down last week along with its tech peers, Facebook's decline of 5.49% was considerably less than Twitter's 8.79%. Why? Even as momentum trading took over last week, investors recognized there is a big, and growing bigger, gap between Facebook and Twitter.

With a paltry, at least by comparison to Facebook, 241 million users, Twitter's active user growth is already showing signs of eroding. In its most recent quarter, Twitter's user base rose about 30%. Facebook? Facebook's active user growth was a mere 16% last year, but with 1.23 billion monthly active users, that's to be expected. But here's the real kicker: Facebook's user growth didn't slow to Twitter's current 30% rate until it had over 900 million users.

Final Foolish thoughts
For Foolish investors with long-term growth aspirations, last week's decline in Facebook's share price for simply being in the wrong place at the wrong time should have you dancing with joy. By the summer, Facebook will have gained back what its lost in value. Why? Because the upside of momentum swings are that they never last. Eventually, the market will begin to focus on what it should have in the first place: fundamentals. And when an emphasis on fundamentals return, Facebook will once again leave its peers in the dust, even as Twitter continues to sputter.

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Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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