Facebook Stock Has Further to Fall Before You Buy It on the Dip

Facebook stock - Facebook Stock Has Further to Fall Before You Buy It on the Dip

Source: Shutterstock

It’s important to take a step back when considering Facebook (NASDAQ:FB) stock. It’s true that Facebook stock saw the biggest one-day decline in market value in history last month; a $119 billion drop is a lot worse than Intel (NASDAQ:INTC) losing $90 billion during the dot-com bust.

From here, it might seem as if Facebook is in a world of trouble after the post-earnings headlines. The news really isn’t that bad, however.

Facebook stock is only down about 1.5% so far this year; it’s up 4% over the past twelve months. Guidance given on the Q2 conference call suggests profit growth is going to be slower than expected, but it’s still positive.

Moreover, Facebook stock already was pricing in a pretty reasonable deceleration, given that it traded at a mid-20s P/E multiple despite 74% adjusted EPS growth in 2017 and a 63% jump in Q1.

Back at a sub-20x P/E multiple excluding cash on the books, Facebook stock looks downright cheap. There are risks here, in terms of both regulation and user growth. Near-term trading might be choppy at best, as a ‘dead cat bounce’ following the sell-off has faded.

Still, longer-term, I see the sell-off as likely providing an opportunity to go long Facebook stock.

Facebook Stock Is Cheap

Fundamentally, Facebook stock unquestionably is cheap. Backing out some $14 per share in cash, Facebook trades at about 22x 2018 consensus EPS estimates. That’s a discount to Alphabet (NASDAQ:GOOGL,GOOG) and in line with established, low-growth companies like Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG).

Just because a stock is cheap doesn’t mean it’s a buy, of course. But the reasonably low P/E and P/FCF multiples (~25x on a trailing basis) show that the market is pricing in either a sharp deceleration of growth and/or the risk that Facebook will lose its current dominance. On both fronts, I don’t see that as quite correct.

Is Growth Ending?

As far as the namesake platform goes, there are signs that the growth algorithm here is starting to crack.

DAUs (daily active users) in key markets have plateaued. Per figures from the 10-Q, DAUs in the US & Canada have risen less than 2% total in the past five quarters, including a flat performance quarter-over-quarter in Q2. DAUs in Europe actually fell Q/Q. Growth rates in Asia-Pacific and the rest of the world are slowing.

The obvious fear is that Facebook usage is hitting a ceiling. Given that its June 2018 DAU number was 20% of the world’s entire population, that fear makes some sense. Combine that with guidance from the Q2 call for higher spending on moderation and site safety, and the post-earnings sell-off makes some sense.

User growth is slowing and the Facebook story, particularly after the Cambridge Analytica mess, is all about Facebook’s users.

ARPU (average revenue per user) is expected to grow more slowly in developed markets, where the Facebook/Google duopoly is pretty much established. All told, revenue will increase at a lesser rate than costs, which first hits margins and then profits.

Is Facebook Going to Fade Away?

But here’s the thing: Facebook is trading at 22x earnings, not 42x. It’s already pricing in something close to high-single-digit/low double-digit growth, assuming that growth continues for years to come (more on that in a moment). While the Facebook platform may be nearing a ceiling, that’s not the only asset that the company controls.

Instagram still is in the early days of being monetized. WhatsApp revenue is minimal. And those are both opportunities for Facebook to create sales and earnings growth going forward. With those two assets, and the still-dominant legacy platform, earnings growth is not going to suddenly stall out or turn negative.

That is, unless something changes and that could be the dominance of the Facebook platform. Regulators already are taking aim at the company in markets across the world. And even many users seem to have a grudging tolerance of the site if not an outright dislike.

But I’m skeptical regulators in most markets (particularly the U.S.) will have the ability to put huge constraints on Facebook. Nor do I see an alternative platform taking over and turning Facebook into the next Myspace.

Snap (NYSE:SNAP) already is losing to Instagram. Twitter (NYSE:TWTR) has a niche but that’s about it. Facebook probably is going to be around for a long timeand that alone likely is enough to suggest upside in the stock.

The Case for Facebook

So the argument for taking a long position in Facebook at current levels is reasonably simple. As long as the company proves to be a permanent part of the tech landscape, and as long as earnings grow at all, Facebook stock probably gains over time.

The question at the moment, however, is whether a better entry point might be on the way. Between the Cambridge Analytica issues in March and the post-earnings sell-off in July, FB already has taken two big hits.

There was a clear “buy the dip” argument after Q2 and it already has faded. Optimism toward the stock seems reasonably low, and it’s not hard to imagine a further sell-off, particularly with a market (or tech) correction at some point during the rest of the year.

Trying to time the bottom may be too cute, admittedly. If an investor sees long-term upside, prices near a four-month low probably provide a solid entry point. From here, it does look like Facebook will gain at some point – but patience might be advised.

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


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/facebook-stock-further-buy-dip/.

©2023 InvestorPlace Media, LLC