Facebook (FB) has been going strong in 2015, up 22% vs. about 2% for the S&P 500 index. And in the bigger picture, FB stock is also up about 150% from its 2012 IPO vs. roughly 60% for the broader market.
Shares of Facebook stock did hit a bit of a snag after reporting its Q2 numbers, with shares flat for the past month … but Facebook earnings posted beats across the board, and investors haven’t exactly rushed for the exits as FB stock has held pretty firm.
So what’s the score with FB stock here? Is Facebook a buy on this minor pullback, or should investors worry that the pause will turn into a lingering downturn?
I think it’s the former, and here are five reasons why:
Buy FB Stock Because…
Click to EnlargeIt’s Big and Getting Bigger: Facebook is huge, but somehow continues to find ways to grow. In Q2, FB reported it saw daily active users rise 17% to 968 million, and monthly active users up 13% to 1.49 billion. Or as InvestorPlace’s Tom Taulli put it, “For perspective, FB added more than 190 million net MAUs, which is more than half of Twitter’s total MAUs.” That kind of scale is incredibly valuable, and the fact that Facebook is still growing is a testament to CEO Mark Zuckerberg and the staying power of FB stock.
Instagram: Beyond the Facebook platform itself, there’s big potential from photo-sharing app Instagram. FB spent a cool $1 billion on Instagram in 2012, and now the platform is up to 300 million users with big advertising plans to cash in on those eyeballs.
Agile Advertising Model: Beyond just reach, Facebook has something much more important — a sophisticated system of “monetizing” its users through its Atlas ad targeting programs. Digital marketers are ga-ga over Facebook ads because they allow very specific targeting based on age, geography, interests and a host of other options. This kind of 21st-century ad technology is in high demand, and Facebook is actually challenging online ads king Google (GOOG, GOOGL) with its marketing might.
Fundamentals Look Good: By the way, Facebook earnings hit 50 cents per share in Q2, topping Wall Street estimates of 47 cents per share and up 14% from 2014. Revenues were also slightly above expectations at $4.04 billion vs. a $3.99 billion forecast for FB stock, and up 39% year-over-year. What’s not to like about those numbers, particularly given both top-line pressures for the market at large and bottom-line pressures for most high-growth tech stocks these days?
Fair Valuation: Even with these growth metrics, investors aren’t paying a staggering premium for FB stock. Facebook is projected to earn $2.75 next year, giving shares a forward P/E of about 34.5 right now. That’s cheaper than a lot of big name tech stocks out there with P/E ratios of 50, 70 up into the 100s. And at about $95, FB stock is well under recent targets from major Wall Street firms, including a $125 target from Susquehanna on August 11 and a $120 target issued just today by MKM Partners.
All that adds up to a good chance for future upside in FB stock. When you have a high-growth stock with scale, profitability and Wall Street optimism … well, it’s hard to go wrong.
Facebook stock has admittedly been a laggard in the past few weeks. But I think that’s a big buying opportunity.
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 firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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