Two weeks ago, social media giant Facebook (NASDAQ:FB) reported middle-of-the-road second quarter numbers and sounded an exceptionally cautious tone about slower revenue growth and lower margins going forward. FB stock proceeded to drop. Big time. The stock wiped out more than $100 billion in market value in a single day, equating to the biggest drop in stock market history.
But, that historically unprecedented dip has turned out to be a golden buying opportunity.
A few days after the report, FB stock dropped to $167. Since then, the stock has rallied $183. That is a robust 10% rally in just a week. As such, I think it is safe to say that the rebound in FB stock has started.
I also think it is safe to say that this rebound won’t stop anytime soon. FB stock is still dirt cheap relative to its high-growth peers. The fundamentals in the digital advertising business remain strong. The company is also growing beyond digital advertising, and adding much needed revenue diversity. Plus, the technicals look good and point to the long-term uptrend being intact.
Thus, I think the rebound in FB stock is just starting. I easily see prices north of $200 by the end of this year, and at $300 within the next five years.
Here’s a deeper look.
Facebook’s Size Across Multiple Apps Guarantees Long-Term Advertising Success
One of the major reasons FB stock sold off in dramatic fashion was due to management’s guide calling for slower revenue growth in the back-half of 2018.
But, the rationale behind slower revenue growth is that Facebook is following shifts in user engagement and changing its advertising focus from News Feed format to Stories format. New Stories format monetization rates are naturally lower than mature News Feed monetization rates, so Facebook management believes that revenue growth will be negatively affected in the near term.
That seems rather straightforward. In the long term, though, monetization rates in Stories will inevitably match, if not exceed, monetization rates in News Feed because ad dollars follow engagement. Thus, so long as Facebook maintains engagement, its revenue growth trajectory will remain strong.
Here’s the thing: no matter where engagement goes, Facebook is set to capitalize on it.
It owns the biggest News Feed app in the world (Facebook). It owns the biggest Stories apps in the world (WhatsApp and Instagram). And, it owns the biggest communication apps in the world (WhatsApp and Messenger). Thus, no matter where engagement goes, it will inevitably go into a Facebook app.
The Facebook machine has proven to be unprecedented at monetizing engagement. Thus, so long as engagement remains in the Facebook ecosystem, the digital advertising business has a strong outlook.
New Initiatives Provide Much-Needed Growth Diversity
Another big concern at Facebook is that the company is all digital advertising, all the way.
That is presently true. And it stands in stark contrast to digital advertising peer Google (NASDAQ:GOOGL, NASDAQ:GOOG), who is jumping into smart home, self-driving and AI to supplement the mature digital ad business.
But, signs point to Facebook testing new initiatives which, in the long run, will provide much-needed diversity to the company’s revenue streams.
For example, Facebook is jumping into the dating game. The company is also in data partnership talks with big banks, a sign that Facebook is pushing hard on the mobile commerce front and wants to turn its billion-plus Messenger users into shoppers.
Facebook is also getting into the the smart-home game, and plans to launch smart speakers soon. Meanwhile, over at WhatsApp, Facebook is starting to charge businesses to send messages to users.
These are all potential revenue-generating businesses outside of the digital advertising realm. Thus, claims about Facebook not being diversified are presently true but won’t remain true for long.
Valuation Is Compelling
Post big earnings selloff, the valuation on FB stock looks compelling.
This is a stock trading at just 25X forward earnings versus revenue growth north of 40%. Meanwhile, the other FANGs all have lower revenue growth but bigger multiples. Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) trade at triple-digit forward multiples. Google trades at 27X forward earnings.
Granted, Amazon and Netflix have huge margin drivers. Facebook does not. But, Google doesn’t have big margin drivers, either, and 20%-plus revenue growth there is good enough for a 27X forward multiple.
Thus, 40%-plus revenue growth at Facebook warrants at least a 30X forward multiple. For what its worth, all these multiples don’t back out cash, which Facebook has a ton of on its balance sheet.
Technicals Look Good
The big earnings selloff in Facebook caused the stock to break below its 200-day moving average.
FB stock has done this twice before over the past three years, once in late 2016 and once more recently during the Cambridge Analytica fiasco. Both times, the stock quickly bounced back above its 200-day MA and proceeded to rally for several months.
It appears this time is no different. FB stock has already bounced back above its 200-day moving average. Thus, it looks like the long-term uptrend is intact and that the most likely move forward is a multi-month rally.
Bottom Line on FB Stock
The fundamentals look good. Valuation is compelling. And technicals point to a multi-month rally ahead.
In other words, the FB stock rebound is just starting. I easily see this stock hitting $220 by the end of this year, implying 20%-plus upside over the next several months.
As of this writing, Luke Lango was long FB, GOOG and AMZN.