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Facebook signals breakout on strong fundamentals

facebookOn March 30th, 2016, the shares of social networking service Facebook, Inc. (FB) touched a high of $116.99, which was only $0.60 away from the 52-week high of $117.59.

Merely looking at the PE ratio of about 88, a trader may feel that the stock is overpriced. However, it may or may not be the case as the market generally values new age companies based on the future prospects.

Thus, in order to assess whether the stock of Facebook can be bought or sold at the current price, a careful look at the developments and the future plans is a must.

The CEO of Facebook, Mark Zuckerberg, had revealed a four step formula to guide the company towards higher revenues. To begin with, the company would concentrate on building a product, which appeals to the common people. This would be followed by increasing the user base to 1 billion. The third step would be providing facilities for users to interact with businesses. Finally, the company would use advertising to rake up revenues. The formula is applied to all of its four products, namely, social network (core Facebook), Whatsapp, Messenger and Instagram. At the end of 2015, the Facebook platform has more than 900 million customers, while Instagram had more than 400 million users. Similarly, Whatsapp messenger service touched a customer base of 1 billion in February 2016.

Based on the implemented formula, we can understand that the products have tremendous scope for further growth. Instagram, however, is in the fourth step. The company has already started realizing impressive revenues. According to analysts’, Instagram revenues (Facebook does not provide product wise revenues) have crossed $1 billion already and is expected to grow further.

With more than 96% of revenue coming from advertisements, Facebook has gone on full throttle to increase the revenue base from Instagram users. The company is currently allowing a selective group of Instagram users to record videos of one minute play time. Recently, the company announced that it has 200,000 Instagram advertisers.

A recent study showed that messaging takes up 10% of the total time spent on mobile. In this regard, Whatsapp and Facebook’s messenger have a promising revenue growth ahead.

Beginning last week, the company has started shipping the much-awaited virtual reality (VR) headset (Oculus Rift) to clients in 20 countries. This would ultimately result in additional revenue for the company. The virtual reality market is expected to be worth $5.2 billion in 2018. The company expects the user base to increase from the current 0.2 million to 42.8 million in 2016. Thus, fundamentally, the stock is expected to record new yearly highs in the coming weeks.


Technically, the price action remains confined within the ascending channel. Major support exists at 107.90. Thus, as the chart indicates, current uptrend may lead the price to about $125.

Facebook Stock Price: April 4th 2016

To take advantage of the uptrend, a binary options trader should purchase a one touch call option contract with a target level in the range of $120 to $122. The expiry period for the one touch call option contract should be preferably in the last week of April.

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