Investors that purchased Facebook Inc (NASDAQ:FB) stock at the post-IPO lows could be forgiven for thinking they are in Oculus’ virtual reality universe. After all, you don’t get many chances to buy stocks that go up 7x in under five years. Anyone who believed in Zuckerberg’s entrepreneurial skills has earned a great reward.
But, as always, Wall Street is a forward-looking mechanism. Is expensive FB stock still worth purchasing today, or has its explosive growth phase run its course?
According to the analysts, Facebook has at least another five great years ahead. But don’t overlook the potential pitfalls that could sink FB stock before then.
FB Stock Cons
Expensive Stock: Facebook stock is particularly expensive, trading at more than 40 times earnings. There are plenty of reasons to be optimistic about FB’s future. However, valuation still matters, regardless of how good the company’s fundamentals may be.
When you compare Facebook to Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), it is hard to justify the stock’s price. Alphabet is trading at 30 times earnings and has an equally compelling growth story, at least in my view.
Aging Userbase: A recent article compiled evidence of FB’s aging userbase. It’s worth remembering that even teens who signed up with FB at the time of the initial iPhone launch are now in their mid-20s. A 2014 study found that more than half of 65-and-up aged persons had a Facebook account. That number has surely risen since then — and the majority of new users are older folks who already have many contacts using the company’s online platform.
Younger users, by contrast, are more likely to sign up for Instagram, Snapchat, Tumblr or other such alternatives. This isn’t all bad news. FB obviously controls one of those. And younger users aren’t nearly as valuable to advertisers as older ones; the advertising value of Facebook’s core audience grows as users mature and obtain higher incomes. However, to the extent that FB stock is valued as a way to play a younger audience, it needs to have success with Instagram and other platforms aimed at teens as its core product is seen as increasingly stale.
Virtual Reality Disappointment: Virtual reality is expected to be a huge market, with some experts suggesting it will be a $30 billion opportunity by 2020. Much of the excitement around FB stock comes from its early mover role there. However, recent signs out of Oculus Rift suggest reasons to be cautious.
Facebook recently closed nearly half the Oculus pop-up stores within Best Buy Co Inc (NYSE:BBY) stores due to poor customer demand. Oculus cut prices for both the Rift and the touch controller by $100 each.
This could just be a bleeding-edge tech problem. The VR ecosystem simply isn’t that big yet; once more products are introduced except customer demand to pick up. A few high-profile games could turn virtual reality’s fortunes around. However, to the extent VR is already baked into FB stock, there is real risk of disappointment.
FB Stock Pros
Neutralizing Threats: Facebook stock faces a key threat. If people leave their platform, the stock would collapse. Unlike say Alphabet, which has many ways to reach customers with ads, the social media company is more platform-dependent. One of the big bear points with Facebook is that younger people aren’t nearly as excited about Facebook as older folks. FB stock bears will inevitably break out the MySpace analogy sooner or later.
However, Facebook has now shown that it is capable of deflecting threats from insurgent platforms. For a few years, Twitter Inc (NYSE:TWTR) appeared to be a real threat. Hardly anyone thinks that anymore. Google Plus came and went with little effect. What it can’t beat, it can buy. FB’s acquisitions of WhatsApp and Instagram, both decried as expensive at the time, have paid off in spades.
Down Goes Snap: Expanding on that previous point, Facebook has taken seemingly decisive steps to neutralize its latest rival. Shares of Snap Inc (NYSE:SNAP) went public earlier this year with great fanfare. However, SNAP stock hasn’t performed well. From its opening print around $24, it briefly traded higher but has sold off and now is struggling to hold the $20-mark. Why have investors turned on SNAP stock?
In large part, it’s because FB is moving to crush Snap. The company recently decided to clone many of Snap’s features within its Instagram Stories platform. That decision is paying off in spades. Instagram Moments has now passed the 200 million user mark, up 50 million already for the year. More importantly, it makes Instagram Moments more popular than Snapchat, which tallies only 161 million daily users. Remember, Instagram Moments only launched last August and it has already overtaken Snapchat. While bears are right about Facebook’s namesake platform showing its age, don’t underestimate the company’s ability to compete for younger users with other services.
Big EPS Growth Ahead: Analysts have set high marks for FB stock. The consensus Street price target is $160.72. Even after the big run in Facebook stock, $161 would represent a solid win from today’s price.
More impressively, analysts expect earnings to grow 28% this year. Given the company’s track record for smashing earnings estimates, that represents a really good base level of growth, which FB could well beat. Over the next five years, analysts forecast earnings to grow at a 23% per year rate compounded. At that clip, earnings double every three years. FB would be far more profitable and have a low price-to-earnings ratio by 2022 based on today’s price if that earnings growth plays out.
Bottom Line on Facebook Stock
FB stock has become increasingly attractive over the last two years. The company shook off the first big bearish point, solving the mobile monetization problem. Now it has created successful secondary platforms to attract younger users. Unfortunately, Facebook stock fully reflects these developments. It has soared in recent years. You can make the argument to buy a great company, even at merely a fair price. However, for my money, I’d rather wait for a stock market correction that causes a big shake-out in FB stock before purchasing.
At this time of this writing, Ian Bezek held no positions in any of the aforementioned stocks. You can reach him on Twitter at @irbezek.