Over the past three years, Facebook Inc (FB) stock has delivered better performance than its “FANG” tech peers Amazon.com, Inc. (AMZN), Netflix, Inc. (NFLX), and Alphabet Inc (GOOG, GOOGL).
It’s also outperforming its brethren year-to-date — and that is leading some experts to suggest FB stock is overvalued and ready for a correction.
While that very well could happen, I’ll explain why I think FB stock remains the FANG stock to own for the long-term, despite its potentially excessive valuation.
FB Stock Is Worth Every Penny
USA Today finance reporter Matt Krantz recently answered a question from a reader wondering if investors should “like” Facebook stock. His answer?
“Facebook shares aren’t cheap. The stock trades for roughly 90 times the company’s earnings over the past 12 months, which is well above the broad market’s 17.7 trailing P-E. Facebook’s P-E is a pricey three times higher than its expected long-term growth rate.”
That’s a classic answer to this type of question.
What financial pundit in their right mind is going to recommend a stock trading at 90 times earnings? Not many — at least not without some understanding of the person’s accepted level of risk.
So, imagine you’re an investor who has a higher-than-average risk tolerance, and I asked you this:
“FB stock currently trades at 90 times trailing 12-month earnings of $1.29. If I could guarantee you that FB would grow EPS by 30% each year for the next five years, would you be less concerned about paying 90 times TTM EPS?”
Absolutely, you would.
That’s because in five years under the above assumption, Facebook’s EPS would be $4.79. At its Feb. 19 closing price of $104.57, FB stock would have a projected 2021 P/E ratio of 21.8 — well below the 30% growth rate that got it there. And that’s without knowing what future revenue generators Zuckerberg and company can come up with between now and then.
A big one that’s just getting rolling is Facebook’s efforts to monetize its messenger service. Anyone who asks a question of a business through Facebook’s Business for Messenger can be pinged back, creating an ongoing relationship.
Hyatt Hotels Corporation (H) was one of the earliest adopters of the Facebook service. It uses the messenger communication system to provide customer service to hotel guests around the world. Almost a year up and running, and FB has barely scratched the surface in terms of revenue from large companies looking to increase customer engagement. The profit potential is endless.
But don’t forget its existing businesses.
InvestorPlace contributor Brian Nichols reminded readers on Feb. 19 about the long-term prospects for FB stock, suggesting that while the U.S. and Canada account for 51% of its total revenue, only 13.8% of its monthly active users live in the U.S. There is a huge boost coming from monetizing its international users.
However, Nichols also emphasized the fact Facebook’s U.S. average revenue per user has significant upside potential. In its latest quarter, it was $13.54. He expects that could double to $25 by 2020.
It’s a nice problem to have when your most mature market could see revenues double in the next five years.
Facebook stock faced intense scrutiny in its first year as a public company, trading well below its $38 IPO price, but then it took flight as quarterly reports showed growing earnings.
The same skeptics are coming out of the woodwork once again, and like 2013, FB stock will prove them wrong.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
