Facebook Inc (FB) Stock Has Its Brightest Long-Term Outlook in Years

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FB stock - Facebook Inc (FB) Stock Has Its Brightest Long-Term Outlook in Years

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Technology stocks dropped like one big anchor on Friday, June 9, and even the best and brightest of the sector are still struggling to get back to their previous highs. Of particular note was Facebook Inc (NASDAQ:FB), which still is off about 2% from those peaks. It’s recovering, but one has to ask themselves — why did FB stock drop in the first place?

Facebook Inc (FB) Stock Has Its Brightest Long-Term Outlook in Years

Goldman Sachs’ call that sent tech stocks reeling was one concerning valuation. But at a forward price-to-earnings ratio of about 25 and a price/earnings-to-growth ratio of 1.5 (anything over 1 is considered overbought, though 1.5 is hardly excessive), FB was among one of the smallest concerns out there.

Meanwhile, Facebook continues to draw in more users despite its already grandiose size, and unless the economy is slumping — forcing advertisers to cut back on their budgets — Facebook is one of the two best places in the world you can place an ad.

The drop itself was mild, sure, but it’s enough to ask whether this is a buying opportunity or if a correction is just beginning. The nice thing about investing for the long-term is that you really only need to take a multiyear view on the company’s prospects. The rest is just wrangling a little extra value.

That’s all a long way of saying that FB stock will return to all-time highs — and likely soon. You don’t need to wait for the perfect moment to strike.

The FANGs Stumble

Facebook is one of the four “FANG” stocks — including Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Google parent Alphabet Inc (NASDAQ:GOOGL). And funny thing is, for all the worry about their valuations, they’re not all that overdone.

Consider fair value.

Investors could estimate Facebook’s fair value using a 5Y DCF Growth Exit model. The model assumes the fair value of a company is equal to the future cash flow, discounted back to its present value. Assume revenue grows at between 25%-39% in the next five years:

Input Projections
Fiscal Years Ending Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21
Revenue 27,638 38,541 48,176 58,775 72,293 90,367
% Growth 54.2% 39.4% 25.0% 22.0% 23.0% 25.0%
EBITDA 14,769 19,656 24,570 29,975 37,593 45,183
% of Revenue 53.4% 51.0% 51.0% 51.0% 52.0% 50.0%

Source: finbox.io

Capital expenditures as a percentage of revenue rises to 20%, but falls after three to five years. Assuming a discount rate of between 8%-9%, Facebook’s fair value is around $170 a share.

FB stock is trading near all-time highs but still below its fair value, according to finbox.io. Amazon is trading above fair value of $940, but not by much, while NFLX and GOOGL are currently trading for discounts!

Near-Term Risks

Operationally, Facebook seems like a sure thing. Instagram and Messenger are two massive potential pools or revenue for the company, with each boasting hundreds of millions of users.

Better still, each of them is an opportunity for Facebook to raid Snap Inc’s (NYSE:SNAP) Snapchat for ideas, then implement them — helping not just stave off the competition, but crush it.

Still, Facebook isn’t entirely without risk.

On May 4, the company warned that revenue may get squeezed in the near-term. The News Feed is running out of room for ads. Investors need to wait for Instagram to make up for the slack. Ad revenue will not pick up until usage grows for the new photo and video mode options on Facebook’s Instagram Direct messaging service.

Still, the more features Facebook adds to Instagram, the better the odds it will take away Snap’s users. Instagram Stories has already cleaved Snapchat’s growth.

On the main site, Facebook is streaming 20 MLB games for the season. By adding live content, FB will not only draw more users to the site but it will keep users engaged. Expect time spent per day to go up.

Takeaway

A selloff may undermine the bullish thesis for Facebook stock. Value investors would look at the drop as an opportunity to buy a great company.

FB stock fits that profile of a growth company trading at a reasonable price.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.

Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get actionable insight to achieve strong investment returns.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/facebook-inc-fb-stock-long-term/.

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