Facebook Inc. (FB) has rolled back about 7% from recent highs in October. But longer-term, FB stock has jumped almost 40% year-to-date in 2014.
That jump hints that Facebook stock could be a strong buy on the recent pullback.
It’s also worth noting that beyond Facebook Inc. in particular, technology stocks have been a big part of the market’s rise in in the last year or so. While the S&P 500 index is up about 10% on the year, the iShares Dow Jones Technology ETF (IYW) is up roughly 15% in the same period.
Here’s why I think FB stock is worth a buy, even after admittedly mixed Facebook earnings a few weeks back.
Buy Facebook Inc. on a Dip
One of Facebook’s partners in Big Tech, Apple Inc. (AAPL), set the tone for a strong Q3 reporting season for the technology sector. But while Apple earnings clearly showed signs of strength in October, Facebook earnings were a bit mixed.
And FB stock stumbled in the wake of those numbers.
The big black eye was that Facebook said it would be increasing spending significantly in 2015, and at the same time was anticipating a revenue slowdown. Specifically, FB said sales growth should be about 40% to 47% in Q4 — down big time from previous targets of 59%.
The short-term drags are obviously a cause for concern. But the core metrics behind Facebook remain quite impressive for the long-term investor:
- Facebook reported a 59% increase in Q3 revenue to $3.2 billion, topping expectations of $3.1 billion.
- Net income excluding special items hit $806 million, up almost 90% year-over-year.
- Adjusted earnings per share hit 43 cents per share, topping forecasts of 40 cents.
- Daily active users hit 864 million worldwide, growing in all regions including an already-saturated U.S. market, and over 81% of those users (703 million) are on mobile devices.
- Revenue per user continued to grow, hitting a rate of $2.40 worldwide – but most importantly, growing from $6.44 to $7.39 in the U.S. for an impressive 15% growth rate.
The big picture, then, is of an engaging platform that continues to retain loyal users.
And remarkably, Facebook continues to find incremental growth on top of that despite already enjoying a worldwide audience of 1.35 billion people each month. That’s more than one of every six people across the entire world!
Most importantly, this massive penetration is coupled with a good “monetization” strategy.
Facebook is quite effective at making money off its platform by connecting users with advertisers seeking very specific customers. Talk to a few marketers yourself and you’ll find many prefer Facebook’s platform to the conventional internet options like Google Ads. In fact, FB just unveiled a new advertising platform called Atlas that should allow for even more sophisticated targeting of ads going forward.
Buy FB Stock
When you marry billions of loyal users with a good money-making strategy — proven by the fact that profits and margins to date have continued to trend higher — you get an internet stock that’s worth owning.
The step backwards on margins is voluntary, not borne out of an ineffective strategy, and investors should remember that.
Yes, there’s a chance Facebook funds projects that go nowhere or that acquisitions like WhatsApp burn cash for the near future. But this a company with more than $14 billion in the bank, almost no debt and a projection of about $5 billion in operating cash flow this year … so it can afford a little investment in R&D and other efforts.
So, if you can be patient, this pullback after earnings may be a good time to take a position in FB stock.
This is particularly true when you contrast Facebook Inc. with social media stocks like Twitter Inc. (TWTR) and LinkedIn (LNKD). Twitter continues to struggle to turn a profit, and is down about 35% year-to-date in 2014, while LinkedIn stock has gone nowhere in the last year or so.
Facebook is clearly the winner of the three, and long-term investors should have confidence in FB stock.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.