Even at All-Time Highs, Facebook Stock Has More Juice Left
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Facebook, Inc. (NASDAQ:FB) has quieted its doubters — at least for now. Facebook stock reached another all-time closing high on Monday, finishing just south of $205. The stock now has gained 15% so far this year — an improvement that seemed unlikely just a few months ago.
After all, in March, Facebook stock briefly touched $149. The Cambridge Analytica scandal angered users and spooked the markets. In the immediate aftermath of the news, I argued FB stock had real potential trouble ahead.
But, as I wrote back in May, it became clear relatively quickly that I was wrong. Strong first-quarter earnings assuaged investor fears. Users haven’t gone anywhere. So, it’s not necessarily a huge surprise that, of late, Facebook stock has resumed its upward trend.
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There’s still reason to see more gains. If the data issues truly are in the rear-view mirror — and it appears that they are — Facebook stock can continue to gain.
The Valuation and the Risks
It’s important to remember that FB isn’t a high-flying tech stock. In fact, it remains rather cheap. Backing out cash on the balance sheet, the stock trades for just under 20 times 2019 consensus earnings-per-share estimates.
As I’ve noted before, that’s basically the same multiple as The Coca-Cola Co (NYSE:KO). A company whose revenue grew almost 50% in Q1 is valued the same, on an earnings basis, as a challenged consumer products play whose top- and bottom-line growth has been minimal.
Facebook stock is not priced like Netflix, Inc. (NASDAQ:NFLX) or Square Inc (NYSE:SQ) at some massive multiple to profits. And the only way its comparatively low multiple is appropriate, given current growth, is if that growth is coming to a quick end and/or there’s a risk of Facebook being displaced from its social media perch.
Certainly, growth will decelerate at some point. Daily active users already are nearly 20% of the world’s entire population. Facebook can charge higher rates and create better, more targeted ads, but revenue and profit growth will slow — not immediately, though, and, at the moment, not sharply.
As far as Facebook being displaced, the question is by whom? Snap Inc (NYSE:SNAP) can’t even compete with Instagram, let alone Facebook. Instagram Stories now has double the user base of Snapchat. Twitter Inc (NYSE:TWTR) has had a nice turnaround of late, but its social media focus seems more complementary to, rather than in competition with, Facebook.