Facebook (NASDAQ:FB) stock has shown some signs of life of late. FB stock hit its lowest levels in almost two years in December. But the New Year has been good to FB stock, which has risen over 10% in 2019.
I’m still skeptical about FB stock, as I wrote last month. Facebook stock unquestionably is cheap. But the company’s spending is rising in 2019 , which is one reason that the market cap of FB stock suffered the biggest single-day decline in stock market history in August . Meanwhile, regulators are still on the prowl, and Facebook’s user growth almost has to decelerate, given its worldwide reach.
But I’m clearly on the opposite side of Wall Street, which continues to embrace FB stock. That optimism no doubt has contributed to this year’s gains. And if analysts are right, FB stock has more room to rise.
The Street Defends Facebook Stock
At least four analysts have made bullish arguments about FB stock in just the last two weeks. JPMorgan Chase called it a “best idea“, and assigned Facebook stock a price target of $195. Barclays called FB “the best opportunity in large-cap Internet (stocks).”
Baird, too, assigned FB stock a $195 target. And as InvestorPlace’s Harriet Lefton noted this week, RBC Capital called Facebook stock one of its 10 best for 2019. Even Citron Research, better known as a short-seller of stocks like Bausch Health (NYSE:BHC) and Shopify (NYSE:SHOP), has been bullish on Facebook stock.
Those analysts aren’t alone: the average price target on Facebook stock, according to finviz.com, sits at $187. That figure suggests that FB stock can rise another 25% this year.
The analysts’ main points are different, but they share some similar themes. Citron and RBC both highlight the value of Instagram and WhatsApp, two of the company’s platforms that haven’t been monetized to the same extent as its namesake website.
JPMorgan Chase noted that Facebook usage is “stickier than many think;” in other words, most users haven’t left the site despite the negative publicity of 2018. Barclays agrees, as the firm predicts that FB will report higher-than-expected daily average users (DAUs) when it announces its Q4 earnings, likely later this month.
And pretty much every bull points to the current valuation of FB stock, which is cheap. FB still trades at around 20 times analysts’ consensus 2019 EPS estimate, and the valuation of Facebook stock is closer to 17 times after excluding the company’s cash hoard.
The valuation of FB stock suggests that its growth is pretty much coming to an end. And so it’s not too surprising that analysts who don’t believe the company’s growth is over are arguing that FB stock should get more credit and higher multiples.
FB Stock Ahead of Earnings
The rising sentiment towards Facebook stock, both from analysts and investors, sets up an important fourth-quarter earnings report for FB.
In a lot of ways, the bull case on FB is based on the idea that the bad news already is baked into FB stock at its current levels. We already know that the company’s earnings growth is going to slow as its spending on security rises. CEO Mark Zuckerberg has apologized for the company’s slow response to security issues, and he and his company are working to improve on that front.
And so there’s an obvious case that bulls can make in the wake of the Q4 report. Specifically, they can argue that the company’s user-growth figures remain solid, showing that the public still trusts FB or at least still uses its services. Meanwhile, they will likely be able to say that the company’s 2019 outlook remains roughly in- line with investors’ already-low expectations.
Facebook’s revenue will likely still be poised to grow 25%+ this year (analysts’ consensus estimate is 26.5%), reminding investors that the company is still growing. And the same analysts who are backing FB stock now will reaffirm their price targets or even raise them. FB stock will respond by rising, and the 2019 rally will continue.
Truthfully, I wouldn’t be surprised to see that scenario play out. Investors who are bullish on FB probably should look to buy FB ahead of its earnings. But from a longer-term perspective, FB stock is still facing a lot of risk.
Indeed, the key question is whether the bad news really is behind Facebook stock. If it is, the company’s Q4 numbers can give it somewhat of a fresh start, and its late-2018 lows look like a bottom. But if there’s more bad news ahead for FB, the early-year gains of FB stock were just a false start. And actually, I can’t quite shake the feeling that there’s something else coming down the pike.
As of this writing, Vince Martin has no positions in any securities mentioned.
