Despite record earnings, Facebook Inc (NASDAQ:FB) hasn’t had a great month. After briefly hitting $175, a record high, FB stock has traded flat to slightly downward over the past few weeks.
Is FB stock simply too expensive? Some traders seem to think so, given the lackluster response to a great quarter. Other investors may fear political risk, or worry about Facebook’s push into streaming video. On the plus side, however, the company continues running laps around its competition. Despite that, FB stock is hardly the most highly valued out of the mega-cap tech space. Put it all together, and what’s the outlook for Facebook stock today?
FB Stock Pros
Great Quarter: While FB stock has stalled out lately, you can hardly blame the company for that. Last month’s earnings report was another blockbuster offering. The company crushed expectations on both the top and bottom line. EPS of $1.32 blew away the $1.13 consensus estimate, and revenues of $9.32 billion topped estimates by more than $100 million and represent a 45% year-over-year growth rate.
While internet advertising has shown weakness lately for many companies, Facebook seems immune to the downturn. Given its leading position in mobile advertising, the company continues to be a dominant force, and its quarterly results reflect that. To the the extent that Facebook and Alphabet remain a leading mobile advertising duopoly, expect more good things going forward.
Beating Competition: Investors have doubted the long-term stickiness of Facebook’s platform. Since the IPO, critics have been quick to label the company as the next Myspace or other such flash-in-the-pan social media site. However, Facebook continues to disprove this line of thinking.
The core platform held up better than expected. While it is admittedly struggling to attract younger users, its hold on the adult population appears as strong as ever. And with younger users, Facebook’s decision to purchase Instagram looks better and better with every passing quarter. Most recently, it appeared that Snap Inc (NYSE:SNAP) would be a viable competitor to Instagram. But Facebook has effectively headed off that threat; SNAP stock has slumped since its IPO as daily average user momentum slows, while Instagram continues to gain traction.
Not The Most Expensive Tech Stock: After the huge multi-year run in FB stock, it’d be tempting to say it’s too expensive now. And it probably is on traditional valuation metrics. However, compared to other high-fliers, you can make a case for FB stock on a relative basis.
Facebook trades at 37x trailing earnings, but given its unusually high growth rate, it comes in at just 26x forward earnings. Once you back out the company’s $35 billion in cash and marketable securities, things look better yet. Now, if Facebook’s growth rate slows down, the current FB stock price would still be hard to justify. But compared with other tech picks, this is hardly the most loftily-valued of the bunch.
FB Stock Cons
Political Risk: FB stock is exposed to political risk in various ways. The first of these is key man risk. It’s no secret that CEO Mark Zuckerberg seems interested in a potential 2020 presidential campaign. Should Zuckerburg leave, it would deprive Facebook of its visionary leader. It’d also drag Facebook farther yet into partisan controversy. Already, Facebook is cracking down on so-called fake news and hate speech, irritating a decent chunk of its user base with strong political opinions. Having Zuckerburg run for president would almost certainly hurt Facebook’s status with users who opposed his candidacy.
Facebook also must navigate a fine line in dealing with regulation. Particularly in the European Union, large tech companies are increasingly coming under fire for operating as monopolies and abusing their competitive position. While this risk is manageable, it’s a real issue, as Alphabet’s (NASDAQ:GOOGL) multi-billion dollar fine reminded us.
Declining Ad Effectiveness: Several multi-national firms have weighed in negatively on online advertising reach this year. Procter & Gamble (NYSE:PG) recently shared that complaint, suggesting the its nine-figure online marketing budget was garnering few results.
There have long been complaints of bot networks, click fraud, and generally less-than-optimal advertising conditions on Facebook’s network. The company is responding, for example, they’ll stop charging advertisers for erroneous/accidental clicks. That’s a good measure that should help the company’s credibility in the long run. Regardless, more scrutiny of social network ads, as compared with alternatives, is unlikely to be good for Facebook’s profit margins or its growth rate.
Risky Video Push: Facebook is making a big effort in the streaming video space. The company has stated that it intends to become “video-first”, transitioning away from the friends and family content, pictures, and status updates that originally powered the platform. Nowadays, the company plans to pivot to video, with its Watch initiative.
The company will be producing its own content and more heavily featuring in its feed. But I’m not sure the effort will be worth the cost. Facebook’s DNA isn’t built around streaming video, and they may lose a lot of legacy users trying to pivot. Alphabet’s YouTube already owns the space, crossing one billion hours of streaming video a day earlier this year. Other entrenched competition from the likes of Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) will also prove challenging to Facebook’s video ambitions.
Verdict
Facebook remains a compelling long-term growth play on a purely fundamental basis. While one can criticize the effectiveness of its ads and fret about potential political risk, the majority of signs point to bright days ahead for FB stock.
However, it might not matter. The problem, as it often does, comes back to price. Bears focused on valuation may look like fools in the short-run, but in the longer-term, fundamentals can’t be ignored. FB stock is expensive. It could drop 15 or 20 percent in a correction without coming anywhere near cheap on a traditional valuation basis. It’s defensible compared to its peers, but the whole sector could fall significantly. Facebook is putting up great numbers, there is no denying that. But at $169 per share, the market has fully accounted for the company’s fine results.
As of this writing, Ian Bezek did not hold a position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.
