Is Facebook stock the best of the worst? I think it is, but before I explain my reasoning, let’s consider the problems that have caused Facebook stock price to retreat.
The Downside of Facebook Stock
According to Finviz.com, there are 13 technology stocks down more than 10% over the past three months, and Facebook stock was the fifth-worst performer among them. The worst performer was Twitter (NYSE:TWTR), which is down almost 40% during the same period.
Twitter, like Facebook, has credibility issues related to the number of real users on its social media platform. Twitter is struggling to become profitable. The loss of users, fake or real, isn’t going to help it reach that goal.
Facebook’s loss of millions of fake users due to its ongoing election scandal, combined with its stagnant user growth, has hurt it in the short-term. That’s because it has had to spend money to enhance its security and safeguard its users’ privacy, reducing both the amount of time it spends on growth initiatives and its profitability.
In an article published on September 20, InvestorPlace’s Larry Ramer wrote:
The spending on security appears to be a major factor behind a looming, significant reduction in the company’s profitability. [David] Wehner, Facebook’s CFO, divulged that, “we anticipate that total expense growth will exceed revenue growth in 2019.”
It’s never a good sign when a company’s profitability is dropping. That’s especially true for a high tech company that should be constantly finding new ways to increase its top and bottom lines.
The old saying, “If you’re not growing, you’re dying” is especially true for technology companies.
Rather than leading the charge, FB is reacting to the events of today, killing its creativity.
A Different Way to Look at Facebook
But I’m a glass-half-full kind of guy. I see Mark Zuckerberg doing what it takes to protect Facebook’s cash machine by demonstrating that it’s spending BIG dollars to ensure that its users have a good experience and don’t feel that they’re being exploited.
Down the road, Facebook’s decision to take a step backward regarding profitability over the next few quarters will pay big dividends for shareholders who buy FB at today’s discounted price. In an article published on September 20, InvestorPlace’s Ian Bezek wrote:
Facebook stock is now selling for about 22 times its trailing earnings and 19 times its forward earnings. And as I noted above, its earnings are expected to keep growing at a nice clip, despite its scandal-induced headwinds. On the other hand, Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) has price-earnings ratios of 31 times its trailing earnings and 25 times its forward earnings.
FB and Alphabet own most of the online advertising marketplace. Both stocks are a buy in my opinion, but if you can only buy one, Facebook is the better choice, purely due to the low valuation of Facebook stock price.
FB Has Many Levers to Pull
Facebook generates approximately $17.7 billion in free cash flow annually. If that total continues to grow at least 25% per year (its free cash flow increased 70% annually over the past two years), it will be able to easily repurchase cheap Facebook stock and perhaps even pay a dividend, as Bezek suggested. Since FB has zero debt, unlike many of its technology peers, it can spend a great deal of its free cash flow on share buybacks and dividends, rather than paying down debt.
While I have no idea of knowing how Mark Zuckerberg feels about paying a dividend, I do know that FB has repurchased $5.1 billion of Facebook stock in the first six months of 2018, almost three times the amount that it bought back in all of 2017.
Since Facebook stock has reached its lowest level since April, I’d bet the farm that FB will buy back more than $5.1 billion of Facebook stock in the second half of 2018.
Facebook is a buyer of FB stock. You should be, too, since it’s the best buy among S&P 500 losers.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.