Facebook Inc Shares Pulling Back After Reaching New Highs: A Pause That Refreshes?

The stock of Zuckerberg's baby, Facebook Inc FB, has ranged from $51.85 to $78.36 this year – with the latter of those two levels just being tested in recent days. Is the current pullback a buying opportunity?

Facebook bulls and bears do battle on a daily basis in the markets, on the message boards and yes, even on Facebook itself. Right now, the bulls have the edge in terms of actual price evidence – as the stock recently set new all-time highs and is still trading above its long-term uptrend line. However, the sharp nature of the decline in the last few sessions (today not withstanding) has some questioning whether the uptrend line will be able to hold up as support if tested.

What the bulls are seeing in Facebook…

The bulls in Facebook love the company's 23% plus net profit margins – which translates to over $3 billion in annual levered free cash flow for the company. Facebook's balance sheet is a thing of beauty with nearly $14 billion in cash reserves, only $300 million in debt, a current ratio of 12.82 and a debt-to-equity ratio of under 2%. Add to all of that the projected growth in sales and EPS of 34.4% and 24% respectively and the bulls don't seem to have much to worry about? Or, do they?

What the bears are seeing in Facebook…

The bears cannot complain about much with Facebook except for the valuation metrics of the company – and perhaps the intangible privacy concerns that never seem to go away but that largely go ignored by investors. The valuation of FB shares is a concern, though. The company sports a price-to-book of 10.43, a price-to-sales of nearly 20, a market capitalization that trumps the enterprise value of the company and a price-to-earnings ratio of 38 – which is on the expensive side of neutral even for a company sporting such lofty growth estimates. The bears also note that a technical break is not far away from current levels. In this type of situation (stock priced for perfection and this close to a technical breakdown), any misstep by FB operationally or even a poor market condition could lead to a cascading lower in the shares without much notice.

Who will win out?

Technicians note that as long as the uptrend line support holds up, the bulls have to be given the benefit of the doubt in Facebook. Traders will be wading into the shares on the long side as the $73 level is tested. The question is whether those purchases will be rewarded with profits or punished with a quick stop-loss.