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Even at All-Time Highs, Facebook Stock Has More Juice Left

Facebook has recovered from its data scandals -- and new all-time highs look like just the beginning

By Vince Martin, InvestorPlace Contributor

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Facebook Stock

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Facebook, Inc. (NASDAQ:FB) has quieted its doubters — at least for now. Facebook stock reached another all-time closing high on Monday, finishing just south of $205. The stock now has gained 15% so far this year — an improvement that seemed unlikely just a few months ago.

After all, in March, Facebook stock briefly touched $149. The Cambridge Analytica scandal angered users and spooked the markets. In the immediate aftermath of the news, I argued FB stock had real potential trouble ahead.

But, as I wrote back in May, it became clear relatively quickly that I was wrong. Strong first-quarter earnings assuaged investor fears. Users haven’t gone anywhere. So, it’s not necessarily a huge surprise that, of late, Facebook stock has resumed its upward trend.

There’s still reason to see more gains. If the data issues truly are in the rear-view mirror — and it appears that they are — Facebook stock can continue to gain.

The Valuation and the Risks

It’s important to remember that FB isn’t a high-flying tech stock. In fact, it remains rather cheap. Backing out cash on the balance sheet, the stock trades for just under 20 times 2019 consensus earnings-per-share estimates.

As I’ve noted before, that’s basically the same multiple as The Coca-Cola Co (NYSE:KO). A company whose revenue grew almost 50% in Q1 is valued the same, on an earnings basis, as a challenged consumer products play whose top- and bottom-line growth has been minimal.

Facebook stock is not priced like Netflix, Inc. (NASDAQ:NFLX) or Square Inc (NYSE:SQ) at some massive multiple to profits. And the only way its comparatively low multiple is appropriate, given current growth, is if that growth is coming to a quick end and/or there’s a risk of Facebook being displaced from its social media perch.

Certainly, growth will decelerate at some point. Daily active users already are nearly 20% of the world’s entire population. Facebook can charge higher rates and create better, more targeted ads, but revenue and profit growth will slow — not immediately, though, and, at the moment, not sharply.

As far as Facebook being displaced, the question is by whom? Snap Inc (NYSE:SNAP) can’t even compete with Instagram, let alone Facebook. Instagram Stories now has double the user base of Snapchat. Twitter Inc (NYSE:TWTR) has had a nice turnaround of late, but its social media focus seems more complementary to, rather than in competition with, Facebook.

Any new social media platform aiming to do to Facebook what Facebook did to Myspace faces huge barriers to entry. And those barriers actually have grown, thanks to regulation like Europe’s GDPR (General Data Protection Regulation).

Facebook is priced as if growth is going to end relatively quickly. Right now, that seems highly unlikely.

The Growth Opportunities

Even assuming growth slows, Facebook looks too cheap. But there’s another factor to consider. What growth there is now is coming pretty much just from the Facebook platform. Instagram and WhatsApp haven’t really been monetized yet.

That’s starting to change — and the market is starting to notice. Wells Fargo & Co (NYSE:WFC) analysts raised their price target on Facebook stock to $250 due to Instagram revenue. Bloomberg has estimated the business could be worth $100 billion.

And even if revenue from the legacy business slows, the two other platforms can pick up the slack. And barring some unforeseen bad news, it’s hard to see how a stock growing revenue even at 20% annually — a low bar relative to recent results — is going to maintain a ~20 P/E multiple.

Add to that potential forays into dating and home services, and there are several growth drivers here beyond the namesake platform.

Facebook Stock Looks Like a Buy

All told, for Facebook stock to tumble from current levels, something major has to happen. It appeared — briefly — like the data scandals could be that negative catalyst. Disgruntled users abandoning the platform in droves would have hit engagement — and likely ad rates as well.

But that’s not what happened. Instead, the whole episode only seems to prove Facebook’s unassailable role in its users’ everyday lives. And if those users aren’t leaving, the existing Facebook business alone seems to, at worst, support the current valuation. Instagram, WhatsApp and new efforts all suggest even more upside from here. There’s a reason Facebook stock has recovered so quickly — and there are more than enough reasons to think that recent momentum behind the stock will only continue.

As of this writing, Vince Martin has no positions in any securities mentioned.

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/facebook-stock-more-juice-left/.

©2018 InvestorPlace Media, LLC