For the first time in its long bull run, Facebook, Inc. (NASDAQ:FB) has hit some turbulence. Pressure from a shakier broad market and Facebook’s own data scandals sent FB stock down 23% between late January and late March. That appears to be the biggest decline since Facebook stock bottomed below $20 back in 2012.
And I admit that I’d lost some confidence in the stock. I’d already become a bit more cautious at the start of the year, in part due to the reputational risks facing Facebook stock. In March, I argued that the Cambridge Analytica scandal would have a negative, long-term, impact on Facebook.
But it appears that I, and the market as a whole, overreacted. A strong Q1 earnings report showed continued growth and little negative effect on Facebook engagement. Increasingly, it looks like users have chosen to forgive Facebook, and as I wrote last month, that’s really all that matters.
With good news elsewhere and a still-cheap valuation, there’s a case for FB stock to retake all-time highs and clear $200 over the next few months.
Facebook Stock Rebounds
The V-shaped recovery in Facebook stock continues as of this writing. At $184, FB trades around where it did before the Cambridge Analytica news broke. Mark Zuckerberg’s testimony before Congress seemed to allow regulators to get their soundbites and to protect Facebook from immediate regulatory action.
Meanwhile, user behavior doesn’t appear to have changed much. The #DeleteFacebook campaign received a lot of media attention but had little noticeable impact.
A poll released this week shows little, if any, change in user activity. And engagement figures through Q1 (the last month of which could have been affected by the torrent of negative news) remained solid. Facebook’s DAUs (daily active users) grew 13% to a whopping 1.45 billion.
Facebook perhaps isn’t completely out of the woods just yet. Concerns about Facebook usage and adoption among younger customers remain. It’s still possible engagement could trend downward over time. But the risks now seem a lot like the risks I highlighted back toward the beginning of the year. For its part, FB stock seems to be what it was back then – only cheaper.
Good News Elsewhere for FB Stock
Meanwhile, negative headlines aside, 2018 actually has been a good year for Facebook. Q1 fundamentals were absolutely impressive. Facebook earnings crushed consensus, rising 63% on the back of a 50% increase in ad revenue.
The online advertising business in the U.S., in particular, seems basically split between Facebook and Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG) with no real rival emerging beyond Amazon.com, Inc. (NASDAQ:AMZN).
The company’s competitive edge in social media, meanwhile, shows no sign of erosion. The redesign of the Snap Inc (NYSE:SNAP) platform Snapchat was supposed to target the older users on Facebook. It hasn’t worked, and SNAP stock trades near an all-time low after a disappointing Q1 report of its own.
And Facebook has shown it might have room to move beyond its social media model as well. Facebook announced entry into the dating space and sent Match Group Inc (NASDAQ:MTCH) and its parent IAC/InterActiveCorp (NASDAQ:IAC) tumbling. Facebook still has WhatsApp and Instagram to monetize, and contribute to earnings growth.
If the data scandals have been forgotten by users and regulators, as appears to be the case, the bull case for FB stock can re-emerge. And in fact, that case might be better than ever.
Facebook Stock Looks Way Too Cheap
Consensus 2019 EPS estimates for Facebook now have cleared $9. Backing out the company’s $15 per share in cash, that leaves FB stock trading at about 18x forward earnings.
That’s a multiple that suggests an enormous deceleration in profit growth going forward. But there’s no sign of that deceleration, or anything close, just yet.
Facebook is ramping its expense to manage “fake news” and other issues. But the incremental margins from ad revenue still offset most of that spend. Online ad growth continues to be robust. There’s still no one, save Amazon, to break up the Facebook-Google near-duopoly in that industry.
If the worst is behind Facebook, then there’s a clear path to substantial upside. A low 20s P/E multiple, which still is below what FB has received the past few years, plus a likely $20 per share in cash by next year suggests Facebook stock could easily clear $200 in the next twelve months.
That’s at least 12% upside and likely more. And it certainly looks like the worst is behind Facebook.
As of this writing, Vince Martin has no positions in any securities mentioned.
