For readers of my column, you have probably figured out that I’m not a growth stock kind of investor. Yes, I have growth stocks in my long-term diversified portfolio, but I choose them very carefully. However, when it comes to things like Facebook Inc (NASDAQ:FB), I’ve always been queasy because Facebook stock, and many others like it, have always had momentum behind them.
I hate momentum stocks, even when I’m long. It usually means that a stock’s price is getting ahead of its fundamentals, and that can lead to a sharp drop.
So now Facebook stock is at all-time highs, yet it appears to have some solid fundamentals behind it, and it may not be outrageously priced. Is that the case, or is there something to be fearful of? Let’s look at FB stock together.
What You Need to Know About Facebook Stock
Using Statista, I want to see just what engagement looks like for FB. Monthly active users for FB in the U.S. and Canada are growing, but this growth has been flattening out. In 2010, growth was about 6% quarter to quarter, and 25% year-over-year. That has since slowed to less than 2% QTQ and about 6% YOY. On a global basis, there are now 1.712 billion FB users globally, a 4% QTQ increase and 15% increase YOY.
Facebook stock is pegged to have 69.7% of the total revenue market share of social network ads, down from 72.3% in 2014. However, total advertising revenue was $3.077 billion in Q2, up a whopping 68% from Q2 of 2015. Payments and other fees have been stagnant at around $135 million for almost four years.
Another important metric is how much revenue each user generates, or average revenue per user. The numbers here are staggering. North America was up over 40% YOY. Asia-Pacific was up about 37%, while Europe was up about 41%.
When you put this all together, everything looks pretty darn great for Facebook stock. So what about financials, valuation and where we go from here for FB?
Facebook stock has about $23 billion in cash with no debt, or about $10 per share, giving it a net effective price of $116 per share and a market cap of $336 billion. With $6 billion in trailing twelve months net income, that puts the stock at 56x earnings. With net income tripling YOY and operating income more than doubling, I have to confess that FB looks fairly valued right now.
That leaves me with some difficult data to crunch. All the other data looks great, with engagement increasing, and advertisers clearly spending more per active user every year. It says that advertisers recognize that users are growing, and clearly, advertisers are seeing value in placing ads on Facebook. In fact, they see tons of value.
Until there is some massive privacy backlash, I think Facebook will just keep finding ways of improving its engagement. I’m obviously a dope when it comes to privacy settings, because Facebook posts ads that are related to recent Google searches that I’ve done. It even knows people that I just met! In fact, just the other day it suggested I connect with a woman I just met on an online dating site! I hadn’t even asked her out yet! That’s freaky, but it also shows how devious it is at looking for any way to expand engagement.
The valuation scares me, but growth stock fans that like the valuation may just want to connect with Facebook stock.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in FB. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.