The majority of analysts following the stock have an extremely bullish price target on shares of Facebook Inc (NASDAQ:FB). So if their average target is around $227, when will the social networking giant actually get there? In light of the last quarterly earnings report flashing some yellow warning flags, FB stock owners will need to have some patience.
Why the wait? The reasoning was between the lines of FB’s end-of-January earning release.
Facebook reported fourth-quarter ad revenue jumped an astounding 48% to $12.8 billion. Operating margin rose from 52% to 57%. Ahead of the results, Facebook prepped the markets for the stronger profitability at the expense of lower user activity.
And that is where the bad news may concern shareholders.
Time spent on the site fell by 50 million in the quarter but on closer inspection, the lower number is a positive development. The site cracked down on viral videos. It de-emphasized business content in news feeds in favor of updates posted among Facebook friends. The changes are net positive to Facebook’s quarterly results. The company earned $4.27 billion (or $1.44 a share) in the quarter, up from $3.57 billion ($1.21 a share).
Tracking site TipRanks shows that nearly all of the top-rated analysts following the company are bullish on FB stock:
Lack of Real Competition
Twitter Inc (NYSE:TWTR) managed to grow its user activity in the last quarter, sending the stock to yearly highs. Snap Inc (NYSE:SNAP) also reported better user engagement. It may be true that younger users prefer to spend time on Snap or Twitter to the detriment of Facebook, despite Snapchat’s latest update alienating users. Still Facebook’s key app enhancements better align its users with relevant content and that will keep those folks engaged.
In the short-term, Snap and Twitter may have taken some of Facebook’s users but the social network’s stance on delivering quality content to feeds will keep it relevant. So, it’s reasonable to expect that Facebook’s drive to enhance the user’s connections while cleaning out bullies, bots, and duplicate accounts will not go unnoticed by its user base.
Moat with Advertisers
Facebook’s advertisers are willing to pay substantially more, compared to what it pays on other sites. With a box of tools that lead to effective ad targeting, Facebook ensures that its customers get the highest return on its advertising investment. The latest moves that remove fake users and remove spammy content will only benefit those advertisers.
Near-term advertising revenue momentum remains very strong, especially on the mobile front. The chances of a slowdown in earnings are very unlikely. As Facebook matures, the capital investments it makes today will cushion the impact of slower revenue on profits.
Profit margins are already going up.
Facebook’s daily active user (DAU) decline in North America, for the first time since it went public, is still alarming. Further, the company’s past user growth will inevitably slow due to the law of large numbers. But as the largest social networking site in the world with a strong stickiness with its users, the risk of lower usage may not have a negative impact on earnings.
FB Stock Valuation and Takeaway
Facebook could trade at $227 this year, in line with analyst price targets. Morningstar is more conservative, with its $190 fair value and a 12-month price target at $198. Finbox.io, users estimate a fair value for FB stock in the range of $200 – $211. The DCF revenue and growth models project a value of around $200. When compared to other expensive tech stocks like Twitter, Facebook’s implied value goes up.
FB stock is currently valued at a 29x P/E and 20x forward P/E. Earnings will grow more than 75% this year. If EPS grows by over 25% over the next five years, the shares will look under-valued at the recent $180 a piece.
Disclosure: Author holds no shares in any of the companies mentioned.