What’s particularly interesting about Facebook Inc (NASDAQ:FB) stock at the moment is that it’s rather inexpensive. In fact, it’s downright cheap. That perhaps seems odd, given that Facebook stock is worth almost $400 billion, not to mention that FB stock is at an all-time high and that the Facebook stock price has risen by a factor of eight times in barely four years.
But it’s true, at least on an earnings basis. FB stock trades at about 21x analyst estimates for 2017 EPS, and around 20x 2018 figures. Backing out the company’s roughly $10 per share in cash, the multiples drop to 23.4x for 2017 and, incredibly, just 19x for 2018.
The S&P 500 index trades at about 18x-plus 2017 profits and 17x 2018 figures. That means, somewhat incredibly, that Facebook stock trades at a multiple not far above the average U.S. large cap stock.
Coming off a year where FB grew revenue 57% and doubled operating income, that seems ridiculously low. And compared to the post-IPO valuation of Snap Inc (NYSE:SNAP), it seems almost absurd.
There are some reasons for FB’s relatively low multiple — but not enough, in my opinion. Comparing Facebook to SNAP and other high-growth stocks, it’s hard to come to anything but one conclusion. Facebook stock likely has more room to run.
Facebook Stock Is Cheaper Than Most High-Flyers
Whatever one thinks of the SNAP IPO, it certainly highlights just how reasonable Facebook’s valuation is in comparison. Snap Inc, of course, is unprofitable, which makes price-to-earnings comparisons impossible. But at the moment, SNAP trades at an enterprise value to revenue multiple of about 47x. That multiple would value FB stock at $550 — and all of Facebook stock at about $1.6 trillion.
Obviously, that’s a bit of a facetious example. Facebook’s revenue growth is expected to slow in 2017, by the company’s own admission. Snap, in contrast, still is learning how to actually monetize its user base. (Interestingly, SNAP’s price per user metric is barely half that of FB.) And Snap’s valuation – impacted by post-IPO volatility – likely isn’t as true as that of FB stock.
More established peers still highlight an apparent discount for Facebook stock, however. Amazon.com, Inc. (NASDAQ:AMZN) trades at 65x 2018 analyst estimates – a multiple more than triple that of FB. Netflix, Inc. (NASDAQ:NFLX) is in the same range.
Both those companies have higher projected growth and lower margins – which implies room to ramp up earnings once those businesses mature. It’s hardly the case that FB stock should trade at the same levels. But the comparison also seems to imply that Facebook stock is a safer play: while investors in AMZN and NFLX are betting on growth years out, Facebook investors need only worry about the near future.
FB Stock Versus GOOGL
The more interesting comparison is between FB and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). Alphabet has growth worries of its own, as falling per-click ad rates have pressured margins for some time. Beyond the core search business, Google’s initiatives have had mixed success. Investments in self-driving cars and virtual reality are years, if not decades, away from bearing fruit. So-called IoT (Internet of Things) products like Nest and Google Home are facing tough competition from Amazon’s Alexa and a number of startups.
But Alphabet stock is valued right in line with Facebook’s. Backing out the company’s nearly $100 per share in net cash, GOOGL trades at 22x 2017 consensus and 19x 2018. Both figures are pretty much right in line with that of FB stock.
That doesn’t seem right. While Facebook has admitted to slowing growth in its core business, Alphabet’s core business, Google, is seeing outright pressure.
More broadly, the bet on Facebook stock versus Alphabet and Google is a bet on how consumers in the future will use the internet. And Facebook’s continuing growth and global dominance appears to give it an advantage. That advantage — at the same valuation — would seem to argue for a long position in FB over GOOGL.
Is Facebook a Buy Then?
The fact that FB stock is cheaper than peers on its own doesn’t suggest a buy. Some investors — and many analysts — believe SNAP is wildly overvalued. AMZN and NFLX have valuation questions of their own. Alphabet stock is at an all-time high as well. It’s not impossible to be right that Facebook is cheaper than all those stocks — and yet still see Facebook stock decline, if by less than those peers.
And there are risks specific to Facebook stock. The most notable is whether the platform can keep its dominance. Facebook may not be the next Myspace — but it’s likely that at some point, another social networking company will come along. Given the fickle tastes of younger consumers, in particular, the core question for FB stock is whether it will still be the dominant platform in 20 years, or even 10.
For now, however, that risk seems priced in, and then some. We’re nearing a point where the market is pricing Facebook like ‘just another company’ — but Facebook isn’t just another company. It’s a dominant global player, with huge margins. It’s already profitable in a way that Snap and even Twitter Inc (NYSE:TWTR) can only hope to be. And that dominance provides a huge moat around the business: if everyone already is on Facebook, it’s even more difficult to get them to leave.
So the market doesn’t seem to be pricing FB stock accordingly — even considering the risk involved. A sub-20x forward multiple is fitting for a low-growth, established company. Facebook is established — but it still isn’t anywhere near low-growth.
As of this writing, Vince Martin has no positions in any securities mentioned.