There are plenty of reasons to buy Facebook Inc (NASDAQ:FB). But the bull case for Facebook stock was strengthened even further by the contrast between earnings from the company and its upstart competitor, Snap Inc (NYSE:SNAP).
To be fair, both stocks have declined since their respective reports. FB stock has pulled back modestly after its earnings and SNAP stock plunged 21%.
But there are two key factors in both reports that show just how entrenched Facebook remains in social media. With FB stock still reasonably cheap on an earnings basis, the two reports seem to contradict the most important risk facing Facebook stock: whether it will eventually lose its social media dominance to another, newer, competitor.
That seems to set stage for more upside for FBstock.
Snap Inc Looks Like a Pretender to the Social Media Crown
The most obvious evidence of Facebook’s heft is that it clearly cast a shadow over smaller Snap Inc’s earnings. One clear reason for the plunge in SNAP stock was that investors believe FB’s efforts to copy Snapchat attributes are working. That, in turn, suggests that Snapchat isn’t going to be able to displace Facebook, or even erode its social media dominance.
Clearly, that’s bad news for Snap stock, but it’s good news for FB stock, as it still trades at around 24x earnings — a multiple not much above that of The Coca-Cola Co (NYSE:KO). Obviously, investors see risk to Facebook’s future growth. But if Snapchat isn’t the risk investors thought, then the earnings multiple assigned to FB stock should expand.
FB’s Growth Looks Even More Impressive
Snapchat is a much younger, much smaller, platform than Facebook. It grew users 36% year-over-year in its first quarter.
FB’s growth rate was half that, at 18%, but that’s a hugely impressive accomplishment. Facebook grew double-digits off a base of over a billion users. More than one billion! Roughly 17% of the entire world’s population counts as a FB daily active user.
It’s a hugely impressive accomplishment, one taken for granted. And that growth seems to confirm Facebook’s ‘moat’ in social media. Snapchat isn’t taking FB stock down. Twitter Inc (NYSE:TWTR) clearly has fallen by the wayside. Maybe there’s another platform coming down the line. But Facebook’s easy management of the threat from Snapchat shows it will have plenty of tools at its disposal to handle the next challenge.
Facebook Stock Remains Undervalued
The events this month show that FB stock — even after a huge run since its own post-IPO troubles — remains undervalued. Again, the stock is trading at multiples given to traditional, and basically zero-growth, blue chips like KO.
But Facebook stock is still a growth stock, and there still looks to be very few impediments to that growth. A multiple closer to 30x in that context isn’t terribly aggressive. And it would value the stock over $180 per share.
That might seem high. But investors pay for quality and dominance. FB stock clearly offers both.
As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.
