Shares of Facebook Inc (NASDAQ:FB) have been on a tear this year, already up more than 23% in 2017. Based on that alone, FB stock seems too hot to handle and a pullback may seem imminent. But there’s more to the situation than what meets the eye.
After breaking above $130 in late-October, shares quickly cascaded lower. Ironically, Facebook stock hit its low for that particular pullback on Dec. 30, around $110.
So really, FB stock’s rally from the end of Q4 until now has only been about 7.5%. Maybe that seems irrelevant, but it’s more to show that Facebook stock has been playing catch-up this year. It’s not rallying on non-stop hype and euphoria.
You can’t buy FB stock on that basis alone, though.
Should You Buy Facebook Stock?
FB stock is certainly a buy for most investors. Or it should be. The stock’s valuation on a trailing basis looks expensive. It carries a price-to-earnings multiple of 40.5 and trades at 14.8 times last year’s sales. However, on a forward earnings basis, FB stock is much more reasonable.
Facebook trades with a forward P/E ratio of just 21. Many will say a P/E ratio of “just 21” is an oxymoron, as it is still expensive, but consider earnings-per-share expectations going forward. Analysts expect FB to earn $5.42 per share this year, up 28% from last year’s $4.23.
The momentum isn’t a one-year phenomenon either. Analyst estimates call for 23.1% earnings growth in 2018 as well. Five-year expectations — while admittedly less accurate — call for annual EPS growth of 23.5%.
Suddenly, FB stock doesn’t appear all that expensive after all. As for its P/S ratio, that is misleading as well. While Facebook trades at almost 15 times trailing sales, those sales are growing at a very rapid rate.
When I recently took a look at the FANG stocks — Facebook, Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:NFLX) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), formerly Google — I highlighted this very point:
“Even more impressively, Facebook has found a way to grow its revenue growth. That may seem like a typo, but it’s not. FB has managed to not only grow sales on a year-over-year basis, but also accelerate that rate of growth as well. After impressively growing sales in the 40% to 49% range through fiscal 2015, FB has now managed 50%+ revenue growth for five consecutive quarters.”
Final Considerations on FB Stock
Revenue growth alone can’t justify that big of a sales multiple. But the fact that Facebook has such huge margins certainly does. Profit margins of 37% crush its FANG competition. In fact, these huge margins remind me of two other stocks I’ve deemed Future Blue Chip worthy: Visa Inc (NYSE:V) and MasterCard Inc. (NYSE:MA).
Because so much of their top line trickles down to the bottom line, investors shouldn’t value these stocks on sales. When it comes to earnings, FB stock is no slouch, either. Facebook has topped EPS estimates in 13 straight quarters, while investors have only seen one revenue miss during that span.
Not only are sales and earnings both impressive, but Facebook dominates the social media field as well. Daily active users climbed 18% year-over-year to 1.23 billion in the last quarter. Mobile DAUs climbed even faster, up 23% year-over-year to 1.15 billion. Monthly active users soared to 1.86 billion, up 17% YoY.
Indeed, FB stock has been on a big run. A pullback to its 50- or 100-day moving average at $137 and $129 may be in the cards, but Facebook is one heck of a company with strong growth and a reasonable valuation.
Investors could consider buying part of their position now and adding to it on a pullback. Or they could wait for a pullback before initiating a position. In the latter case though, they risk missing out on potential upside, possibly up to $160 in Richard Saintvilus’ view.
I once asked if Alphabet is the best FANG stock to buy. Perhaps it’s time to reconsider.
Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell held position in V and MA.
