The Sands Are Shifting, But Facebook Inc Stock Remains a Buy

Advertisement

Facebook stock - The Sands Are Shifting, But Facebook Inc Stock Remains a Buy

Change is in the air and on multiple fronts. And none of it looks good for Facebook, Inc. (NASDAQ:FB). That is why Facebook stock has struggled for the past three months, bouncing between $170 and $190 with no real constructive and sustainable move to the upside.

It isn’t just Facebook.

Social media hasn’t exactly been painted in the best light recently. These mega internet platforms were supposed to connect all of us and bring us closer together, regardless of distance. For a while, they did just that. But recently, they have been used for ill, as well.

Sites like Facebook, Twitter Inc (NYSE:TWTR) and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) have been used as platforms for spreading fake news and extremist content. They have all been called to testify on Capitol Hill.

Concurrently (and maybe it’s just bad timing), articles are popping up everywhere saying that social media is actually bad for you. Maybe that has something to do with the social media fatigue Facebook is seeing, as its daily usage is dropping.

So Facebook is having to recreate the advertising madness that is it’s news feed. Meanwhile, Snap Inc (NYSE:SNAP) and Twitter seem to be getting their acts together on the digital ad front, and that means increased competition for Facebook.

Put it all together, and it’s easy to see why Facebook stock has struggled recently.

But I don’t think it’s time to wave the red flag.

The company is still a leader in the secular growth digital ad industry and will remain so as long as its reach remains unparalleled. FB is also rolling out multiple ancillary businesses. Those businesses should further diversify the company’s revenue streams. They will also deepen Facebook’s necessity among its users and create a tailwind for engagement.

All in all, I still feel that the best is yet to come for FB. Here’s a deeper look.

Why Facebook Stock Remains a Buy

There is no hiding it. Facebook is staring at some major headwinds. Between fakes news, over-advertising, social media fatigue and bumped-up competition, FB has its fair share of issues.

But the numbers don’t really show it. And there are catalysts coming through the pipeline which should help offset those headwinds and keep growth strong.

Last quarter, Facebook recorded revenue growth of 47% and operating profit growth of 61%. And that is with user time on the site falling by 50 million hours per day. Clearly, Facebook is at a point (2 billion plus users spending lots of time on its suite of platforms) where it doesn’t need to grow the quantity of engagement in order to be successful.

That is because Facebook remains the go-to digital advertising destination globally due to its unparalleled reach. So long as no other social platform rivals Facebook in terms of size, Facebook’s digital ad revenues will be unscathed by competition.

It’s worth mentioning that the digital ad industry is one growing at a near 20% clip. That growth isn’t expected to slow much over the next several years, so neither will Facebook’s digital ad growth. That is the benefit of being a leader in a secular growth market.

Moreover, Facebook is growing its value prop to include things outside of traditional social media. This includes Facebook Watch, which is Facebook’s still young but rapidly growing over-the-top streaming platform. With cord cutting accelerating and over-the-top TV viewership booming, Facebook Watch has a unique opportunity to grow market share in a rapidly growing market.

Then there is Facebook Marketplace, which is essentially the world’s largest garage sale. I fully expect this platform to become more formalized over the next several quarters and years. It will turn from an online garage sale into a digital marketplace which leverages social graphs to connect retailers with interested consumers.

There is also Facebook Workplace, which is essentially corporate Facebook for a fee. As social media usage continues to grow, enterprise social networking (the use of social media platforms for workplace communication and other tasks) is following suit. Considering Facebook is the largest personal social network, it only seems natural for it to be the largest enterprise social network as well.

Those are just a handful of many forthcoming catalysts for Facebook stock which should diversify revenue streams and boost the long-term growth profile.

Bottom Line on FB Stock

Facebook stock trades at just 24.3 times forward earnings for what analysts see as a 27% long-term earnings growth rate. That means FB stock is trading at price-to-earnings/growth (PEG) ratio of 0.9, well under the market-average PEG of 1.1.

Broadly speaking, that means that investors are pricing in a whole bunch of risks into FB stock. Given the company’s continued robust growth despite drops in user engagement, the forthcoming operational catalysts, and the huge 2 million-plus user moat, those risks seem overdone.

I understand the headwinds, and I see that times are changing. But even in the face of all that, Facebook stock remains a buy.

As of this writing, Luke Lango was long FB, GOOGL and SNAP.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/the-sands-are-shifting-but-facebook-stock-remains-a-buy/.

©2024 InvestorPlace Media, LLC