Zuckerberg survived…now comes the hard work


This post is for education purposes only and should not be interpreted as a trade recommendation.

Mark Zuckerberg is probably back in Menlo Park, California today. He survived two days of testimony in Congress about user-data breaches. Now comes the hard work for the stock and investors.

The main takeaway is that Facebook’s (FB) founder and CEO did a good job deflecting criticism and admitting guilt. Most lawmakers nibbled around peripheral issues without threatening serious kinds of regulation or anti-trust actions. Most analysts remained positive on the company, citing its dominant market position and potential for better monetization of mobile and Instagram.

But it might not be that simple. There are a few reasons to doubt things will be as easy going for FB any time soon.

The first big issue hanging over FB is the cost of increased privacy and content supervision. As Zuckerberg himself said “this will significantly impact our profitability going forward.”

Next, even if the data flap doesn’t cost FB a lot of users, its North American traffic declined in the fourth quarter for the first time ever.

In other words, the social-media giant is changing from a raw-growth story to an “execution” story. Not only must it succeed in squeezing more revenue out of each user. It must also do this while adding more compliance personnel. That could result in less-certain profitability and blemish a once-flawless growth story. Investors usually respond to that kind of situation by lowering the valuation multiples they’re willing to pay.

Additionally, there’s some real technical damage on the chart. FB tried — and failed — to break out through $190 two months ago. It then broke below its 200-day moving average and remains there since. By the way, that puts it in a minority of its peers because 59 other members of the Nasdaq-100 index are over their 200-day moving averages. (Enter “$200DMAAND” into your chart for more.)

Zuckerberg’s stock may also struggle to get back above the $168-170 zone. It bounced there in October, December and February.. only to knife through it last month. Is “support” now “resistance?”

One final thought: The real “Facebook trade” might not be FB at all, but other key technology names. Zuckerberg’s departure from Capitol Hill will probably lift a cloud from the broader sector, and there are plenty of other companies untainted by the public spotlight at present. Now could be the time to return to other names in the space — all except FB.

Facebook (FB) chart
Facebook (FB) chart
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.