Facebook Inc: What Happens to Facebook Stock When User Growth Hits a Wall?

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In a good bear market, everything takes a haircut, even the most glamorous of growth stocks. The mighty Facebook (FB), the “F” in the “FANG” stocks that dominated last year, was down a good 17% from its all-time highs at one point earlier this month.

Facebook Inc: What Happens to Facebook Stock When User Growth Hits a Wall?So now that some of the shine is off, is Facebook stock finally cheap enough to buy?

Let’s do a deep dive of FB and take a look.

By all traditional metrics, Facebook is pricey. It trades for 78 times trailing earnings and nearly 16 times sales. To put that in perspective, Internet rival Alphabet (GOOGL) trades for 30 times trailing earnings and six times sales.

Now, admittedly, this isn’t an apples-to-apples comparison. Alphabet is a much larger company and is expected to grow at a much slower clip. But it’s fair to say that investors are paying a large premium to get a piece of Facebook stock’s future growth.

Looking at expected earnings, Facebook stock looks a little more reasonably priced, trading at 25 times expected earnings for next year. That’s still a large premium over the S&P 500’s forward price-earnings of about 15, but again, FB is a much faster-growing company.

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Between now and the end of 2018, Facebook stock is expected to boost its earnings per share by more than four times. There aren’t a lot of places outside of speculative biotechs where that kind of growth is even a remote possibility. Looking at revenue estimates, we see more good news:

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Facebook’s revenues are projected to jump 141% between now and the end of 2018.

Based on estimates, Facebook stock doesn’t seem too unreasonably priced. But are the estimates themselves reasonable?

Let’s take a look.

As of the end of last year, FB had 1.59 billion monthly active users and 1.44 billion monthly active mobile users, increases of 14% and 21% over the previous year, respectively. Based on recent figures, that is 47% of the entire world population that currently has access to the Internet.

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I’ve been wildly impressed that Facebook has been able to keep up that kind of growth. But at some point, and I would expect soon, the user growth will dramatically slow.

And even if it doesn’t, not all users are created equal. American and Canadian users make up 14% of the total user base, yet account for 51% of all revenues. American and Canadian revenue per user is an impressive $13.54. But among European users, that number drops to just $4.50 and in Asia and the rest of the world it drops all the way to $1.59 and $1.22, respectively.

Overseas customers simply aren’t worth as much to advertisers, or at least not yet. That means that in order for Facebook to meet its heady growth estimates, one or more of the following must happen:

  • FB must be able to squeeze even more revenue out of its North American users.
  • FB must convince advertisers that non-North American users are worth paying for.
  • FB’s other initiatives — such as Instagram and Oculus — had better start delivering in a hurry.

Can Facebook deliver here? I wouldn’t rule it out.

It’s risky, but then, just about everything seems a little risky these days. If you’re a growth investor, Facebook stock is one to consider once the dust settles in this bear market.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/facebook-stock-fb-4/.

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