23 Aug, 2017 Is Facebook Inc (FB) Stock Back in the “Buy” Pile?
The first laugh in Facebook Inc’s (NASDAQ: FB ) publicly traded life went to the doubters, as the social network fell on its face shortly after its 2012 IPO, falling from a $38 IPO price to below $20 within months. But most of the laughs since then have gone to the bulls, with FB stock up 550% since bottoming out that year – including a stellar 45% run in 2017.
Naturally, any time investors miss a massive rally in something – be it Facebook, Netflix, Inc. (NASDAQ: NFLX ), Apple Inc (NASDAQ: AAPL ), Amazon.com, Inc. (NASDAQ: AMZN ) or even assets like gold or real estate – they wonder whether the train has already left the station.
I don’t necessarily think that’s the case with FB stock, hot as it has been.
Facebook’s Business Is Maturing, Not Mature
It’s fair to say that the “easy” money has been made. Facebook shares have ripped off compound annual growth of nearly 55% since the late-summer bottom of 2012, and it’s asinine to expect those kinds of returns from a nearly $500 billion company.
That isn’t to say Facebook can’t keep clobbering the market.
Growth remains robust, with revenues expanding almost 45% year-over-year last quarter. The previous quarter boasted top-line growth of 49.3% – barely snapping a five-quarter streak of 50%-plus sales improvement. Earnings of $1.32 peer share came in 17% ahead of the consensus expectation.
Facebook is relentless, too, already having relegated Twitter Inc (NYSE: TWTR ) to also-ran status and using Snapchat’s own tricks to put the hurt on Snap Inc (NYSE: SNAP ).
Yes, growth eventually slows for everyone. Facebook simply can’t keep up its current rate, and Wall Street doesn’t even expect it to. Analysts peg a top-line gain of about 41% this year; next year, forecasts call for “just” 30% improvement. Earnings are expected to grow between 22% and 26% over the next couple years.
You could argue that FB stock is overbought at current prices, but the long-term outlook makes it a “patient buy,” not a stock to run away from.
Where FB starts to look unpalatable is its valuation metrics. Specifically, Facebook shares trade at 26 times forward earnings estimates and nearly 15 times last year’s sales.
Those are big numbers on the surface, but there’s so much else to consider.
How much do you value a company that literally connects about 2 billion people in a world with a population of about 7 billion, and only about half those have consistent access to the internet? Said differently, Facebook connects more than half the connected world .
More than 1.3 people logged onto the platform on a daily basis, which was 17% more than it was a year ago. There’s simply more potential value in a platform like this than there is in a Twitter or Snapchat.
Moreover, a forward P/E of 26 doesn’t look too bad when you’re considering projected sales growth north of 40% and earnings expansion above 20%.
The sales valuation is expensive, but it’s also deceptive. Visa Inc (NYSE: V ) and Mastercard Inc (NYSE: MA ) have high P/S figures, too, but their margins are so wide that much of their top line trickles down into profits. FB is in a similar high-margin situation, thus the result is a misleadingly high P/B but a relatively more reasonable earnings valuation.
Profit margins near 40% are widening, too. And operating margins of 47% last quarter grew 500 basis points YOY. The only thing growing more impressively is cash flow; last quarter, FB generated $3.9 billion in FCF, up 46.6% from the year prior.
Bottom Line on FB Stock
Investors could easily dismiss Facebook shares on valuation concerns alone. But even a cursory look at the underlying business shows that business is good, and that the company’s earnings growth isn’t engineered, but legitimate.
Not to mention, Facebook’s massive moat continues to swell alongside its user counts. Properties like Instagram and WhatsApp further spread that connection among different cultures, regions and demographics.
You want to own Facebook stock. The question is where. The answer? On pullbacks. At the moment, I’m looking for a pullback to price support in the low $150s, though even the 50-day moving average around $160 would be acceptable for less patient investors.