Facebook Stock: Be Greedy When Others Are Fearful
Facebook (FB) is facing plenty of criticism because of data privacy issues and the company's influence on the way information is reported and distributed on the platform. Management deserves such criticism to a good degree, and the company needs to make sure that it can find the right way to overcome these challenges in the years ahead.
Nevertheless, these problems are already incorporated into the stock price, and financial performance remains impressive in spite of all the challenges that the company is facing.
In the words of Warren Buffett, the right time to be greedy is when others are fearful, and there are plenty of fears surrounding FB's stock right now.
The Business Remains Intact
The data shows that the business is still growing at full speed and the company downright crushed expectations in the fourth quarter of 2018.
Even if growth is slowing down in the main Facebook platform, the company still registered a healthy increase of 9% in monthly active users, reaching 2.32 billion as of December 2018. Daily users also grew 9% year-over-year last quarter to 1.52 billion.
There are now 2.7 billion people using Facebook, Instagram, WhatsApp or Messenger each month, and the company has over 7 million advertisers, up from 6 million in late 2017.
Facebook is efficiently translating its user growth into revenue and earnings growth. Revenue reached $16.91 billion last quarter, up 30% annually in dollars and 33% in constant currency. Mobile advertising revenue represented 93% of advertising revenue for the fourth quarter of 2018.
The company is aggressively investing in data centers, security, and product development. Total costs and expenses increased 62% year-over-year in the fourth quarter of 2018. However, profit margins are still stratospheric: Facebook retained 45% of revenue as operating profit during the full-year 2018.
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Source: Facebook Investor Presentation
All being said and done, Facebook reported $2.38 in earnings per share last quarter, growing 65% year-over-year and surpassing Wall Street expectations by $0.2 per share.
Moving forward, Facebook still has a lot of room for growth in the years ahead. The company has barely taken its first steps in terms of monetizing Instagram, WhatsApp, and Facebook Messenger.
The company made $34.86 per user in the US and Canada last quarter. The number represents an increase of 30.3% versus revenue per user in the same region during the fourth quarter of 2017. Even in its most mature and saturated markets, Facebook is rapidly increasing its monetization levels.
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Source: Facebook Investor Presentation
More importantly, revenue per user is only $7.37 on a worldwide scale, which means it's only 21% of what the company makes per user in the US and Canada. Facebook has abundant potential to bring monetization levels around the world to levels more in line with those of the US and Canada, which could be a powerful growth driver for the business.
In simple terms, Facebook is still gaining more users, especially in WhatsApp and Instagram, the company has a lot of room to make more money per user, and the business model produces exceptional profitability levels. When looking at the big picture, it's only fair to say that Facebook remains a world-class business in spite of all the criticism that it is facing.
Value And Opportunity In Facebook
Short-term uncertainty can many times create buying opportunities for long-term investors, and this seems to be the case when it comes to Facebook. Valuation levels look clearly attractive for such a profitable growth business.
The table below shows FB's price-to-earnings ratio, price-to-earnings growth based on long-term growth expectations, and price-to-cash flow versus the average stock in the Interactive Media And Services Industry. Facebook is arguably the best stock in the sector, yet it's priced at a discount versus industry peers.
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Data from S&P Global via Portfolio123
The stock is also priced at bargain-low levels by historical standards. The chart shows how some major valuation ratios have evolved in the past several years, and it's easy to see how Facebook is priced at a massive discount in comparison to the valuation levels a few years ago.
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Data by YCharts
Valuation is not just about looking at the valuation ratios in isolation. Price is what you pay and value is what you get, so valuation levels need to be interpreted in their due context, incorporating other return drivers such as financial quality and fundamental momentum.
Facebook is among the best 10% of stocks in the market based on the quantitative algorithm. This means that the stock looks clearly attractive when considering the main quantitative return drivers.
The numbers alone don't tell you the whole story, of course. We need to evaluate the business behind those numbers in order to tell if the company can sustain its revenue growth rates and cash flow generation capabilities in the future or not.
Data privacy and regulatory risks are major considerations to keep in mind, and Facebook doesn't have any room for error left in these areas. Besides, the company operates in a very dynamic and an always changing industry. Even if Facebook is the undisputed leader in social media by a wide margin, it makes sense for investors to keep a close eye on the competitive landscape over the years ahead.
Those risks being acknowledged, making investment decisions based on quantified data is certainly a sound approach than relying entirely on emotions and subjectivities to pick stocks. According to the cold hard numbers, Facebook is well positioned for attractive gains in the years ahead.
The Ultimate Edge
When analyzing a company such as Facebook, it's hard to find any information edge. Facebook is a widely followed stock, and chances are that all the relevant information is already incorporated into the market expectations.
However, most market participants are focused on the intermediate- and short-term, trying to find out how the stock will evolve in the coming weeks and months. In such a time frame, it's hard to tell what kind of impact the uncertainties will have on Facebook's stock.
On the other hand, when thinking about the coming five years or more, chances are that Facebook will be able to leave its problems behind, and everything indicates that the company will keep producing vigorous growth in revenue and earnings.
Patience is not only a virtue but also sometimes a necessity if you are looking to obtain superior returns in the stock market. For long-term investors who can tolerate the short-term uncertainty, Facebook's stock looks like an attractive proposition at current prices.
Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in ...
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