Shares of Facebook (NASDAQ:FB) stock have been under tremendous pressure over the past year, but the stock has weathered the recent storm surprisingly well. In fact, over the past month, Facebook stock is the best performing FANG stock. Over the past three months, it’s the second-best just behind Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL).
However, that doesn’t hide the fact that FB is the second-worst performing FANG stock over the past six months. Its 32% decline is only slightly better than Netflix’s (NASDAQ:NFLX) 33.8% drop. Over the last 12 months, FB stock sits at the bottom of the barrel, falling more than 26%. Surprisingly, NFLX is the best performer over that time, rising almost 33%. Amazon (NASDAQ:AMZN) is a runner up with its 27.5% gain.
Now that we’re coming into 2019 though, 2018 is in the rearview mirror — something Facebook couldn’t be happier about. We now need the social media juggernaut to put together a few good quarters for Wall Street and for the negative news flow to stop. It has been one bombshell after another and rather than be excited by Facebook’s future, investors are starting to dread it.
Facebook’s Moat
I’m not a Facebook user, but I spend some time on the company’s other asset, Instagram. Not only is Instagram driving serious user growth to Facebook’s overall position, but it is driving ad growth as well. Given Facebook’s immense user data, it’s able to offer precision ad-targeting to advertisers.
Is that really a bad thing? I actually don’t think so. From a business perspective, this gives Facebook more pricing power vs. its competition like Twitter (NYSE:TWTR). It also gives Facebook advertisers more accuracy when placing ads in users’ feeds, helping to convert more sales. That’s a boon for Facebook, as these advertisers want to spend more on this approach.
From a user standpoint, this is also a benefit. I’d rather get advertisements for Architectural Digest rather the Oprah Magazine. I don’t have any issues with the latter, but I have a real passion for the former. Seeing ads for its magazine is more relevant to me and so rather than dismissing it without a thought, I mull the decision of whether I want to subscribe.
I consider this a win-win, although many users are taking issue with how Facebook handles their data. That makes total sense and FB will need to find a way to get back in the good graces of its users. Ultimately, they are what drive the bottom line. No users equals no revenue, simple as that. With that being said, social media is here to stay. Whether it’s Twitter, Snap (NYSE:SNAP), Instagram or something else. It’s FB’s job to make sure it stays No. 1.
Valuing Facebook Stock
Currently trading near $133 a share, Facebook stock would be worth a lot less without its other assets. After snatching up Instagram for $1 billion, estimates put its value at more than $100 billion now. That’s not surprising, given that it hit the 1 billion user mark during the summer. Facebook’s other large asset (aside from its legacy platform) is WhatsApp. FB acquired the company for $19 billion and many investors are wondering if or how it will ever make money. According to management, they will begin monetizing WhatsApp in 2019. In the meantime, use remains robust, with 1.5 billion active users and 60 billion messages sent per day on the platform.
Combining it altogether, where does that leave FB stock?
The July earnings report was a disaster, but Facebook stock seemed back on track in October. If the company can maintain that momentum, it should setup for a decent finish to 2018 and a stable 2019. Current expectations call for earnings of $7.38 per share this year, up almost 37% from the prior year. It leaves FB stock trading at just 18 times this year’s earnings. That goes along with 36% sales growth for the year.
In 2019, consensus expectations call for 24.5% sales growth, but just 1% earnings growth. Could the bar be any lower? That valuation is attractive based on 2018 earnings, but less so in 2019. That makes FB a prove-it story. If the company can grow earnings at a faster pace, shares can bottom and start to rally. If not, a lower stock price may be in store. Last but not least, don’t forget FB is a balance sheet titan.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, he was long AMZN and GOOGL.
