Facebook, Inc. (NASDAQ:FB) has been a steady riser since August, but it’s been a slow grind. The FB stock price is up “just” 7% since August. Although that’s a healthy gain for most stocks, some investors may be growing impatient with Facebook stock. Should you look elsewhere for a better performer or stick to your guns on FB?
I think we should stick with Facebook, and there are good reasons why. FANG was a strong performer Tuesday, the first trading day of 2018. Amazon.com, Inc. (NASDAQ:AMZN) jumped 1.7%, Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) climbed 1.9% and Netflix, Inc. (NASDAQ:NFLX) soared 4.75% and broke out over $200 and current resistance.
For Facebook’s part, it climbed 2.8% and added another 1.8% gain Wednesday as well.
Investors, at least for now, are speaking loud and clear. They want to own FANG. And why shouldn’t they? It’s a collection of game-changing technology companies. While some — like Netflix and Amazon — have huge valuations, Alphabet and Facebook are actually reasonable.
Breaking Down Facebook
Some will look at the FB stock price and instantly discard it because of its price-to-earnings (P/E) ratio of 35. Its forward P/E ratio is slightly less daunting at 27.8. And while those numbers seem incredibly high for traditional value investors, growth investors see it as reasonable.
I do too, when considering that Facebook will grow its earnings by almost 40% this year on 45.5% sales growth.
Admittedly, the issue comes in 2018, when that earnings growth is expected to slow to just 13.3%. However, through the first three quarters of fiscal 2017, Facebook has earned $3.68. That’s more than 20% higher than the collective $3.27 in earnings per share analysts were looking for.
For that reason, and along with the fact that Facebook hasn’t missed an earnings per share estimate in at least four years, I think next year’s estimates are too low. Just using the 20% shortfall so far through 2017, we could be looking at growth of 35% in 2018 rather than just 13.3%.
Perhaps that’s too much, but you get the idea. Even being short by half that amount — 10% — we’re still talking about 25% earnings growth. In all likelihood, current estimates are too low.
It also helps the growth outlook to see analysts forecast 33% sales growth next year. For a $483-billion market cap company, it’s pretty impressive to see sales growth north of 30%. Despite Facebook’s huge revenue growth, it trades at a reasonable valuation compared to a company like Amazon. In fact, despite FB’s more attractive valuation, its sales growth is stronger as well.
It’s comparable to the revenue growth from Alibaba Holding Group Ltd (NYSE:BABA). While BABA has stronger earnings growth than FB, the latter has better margins and a larger bottom line.
The Bottom Line on FB Stock
All of this is to say that FB stock is not as egregiously priced as one might think. On the surface, it doesn’t look cheap. But given that it has operating and profit margins of nearly 50%, we’re talking about a serious cash cow. That point is only highlighted when you consider how fast that top line is growing and how much of it falls to the bottom line.
So what do we do with FB stock price? Let’s look at the chart.
Click to Enlarge
After two very strong days, we’ve finally got something to trade in FB. Although buying at all-time highs makes some investors queasy, it does give traders a great risk/reward. So long as the FB stock price closes above this $184 breakout level, we can stay long. On a close below, we’ll have to reevaluate, while short-term traders can use this as their stop-loss.
As it stands though, FB stock remains in an uptrend. The 50-day moving average (blue) continues to move higher, as do the recent lows over the prior months. On a failed breakout, investors can buy FB stock on a pullback into trend-line support.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
