Shares of Facebook (NASDAQ:FB) popped in late April to fresh 2019 highs after the social media giant reported first quarter numbers that topped expectations, while delivering a full-year 2019 guide that was also better-than-expected. Facebook stock rose a few percent to levels close to $195, bringing the stock’s year-to-date rally to almost 50%.
This rally is far from over.
In the big picture, Facebook has put to rest data privacy concerns which hammered the stock in 2018. The company cleaned up its act, redesigned its ecosystem around security and safety, and poured billions of dollars into making sure its mistakes wouldn’t be repeated.
Now, the company is back to firing on all cylinders. The user base is still growing. Revenues are still rising at a 20%-plus rate. Margins are starting to stabilize after several quarters of super-charged expense growth.
In other words, Facebook is back to being Facebook. That’s a good thing. Ultimately, it means that Facebook stock is back to being a long term winner that investors should hold for the long haul.
To be sure, the stock may run into some resistance around $200. That’s a natural exit point for some investors who bought the dip in late 2018. But, fundamentals say that Facebook stock has upside to levels well above $200 in 2019, and with bulls now in control, there’s no reason the stock won’t run above $200 within the new few months.
The Five Big Takeaways
Broadly speaking, Facebook’s first quarter earnings report was really good, with five big takeaways. Those five big takeaways are as follows:
- The already huge platform is still adding users. Despite having over 1.5 billion daily active users and over 2.3 billion monthly active users, Facebook continues to grow its user base. Daily and monthly actives both rose 8% year-over-year in the quarter, and posted their highest sequential growth in a year.
- Facebook is dominating Stories like the company dominated News Feed. Behind Facebook and Instagram, Facebook has long held unrivaled dominance in the social media digital world thanks to its huge News Feed audience. That dominance was temporarily threatened by the onset of Stories apps like Snap. That threat has been neutralized. All three of Facebook’s Stories platforms (Facebook + Messenger Stories, Instagram Stories, and WhatsApp Status) have over 500 million daily active users, versus less than 200 million at Snap.
- Facebook is figuring out how to monetize Stories. Price per ad in the quarter dropped 4% year-over-year, largely due to a shift towards cheaper Stories ads which still aren’t as effective as News Feed ads. But, Facebook is rolling things out like Interactive Stories Ads, and that’s improving the effectiveness of Stories ads. Over time, this effectiveness will only grow, and price per ad will still start to rise again, providing a tailwind for overall revenue growth.
- The company is doing everything right to move past the 2018 data privacy headwinds. The first part of the conference call was entirely centered around CEO Mark Zuckerberg and COO Sheryl Sandberg talking about how they are improving the ecosystem’s privacy and security, assuaging fears that management isn’t doing anything to fix the company’s issues. Further, adjusted expenses rose 34% year-over-year, while headcount grew 37%, and most of the increase in both categories was to enhance data security and platform safety.
- Revenue growth trends remain robust, and expense growth is moderating. Revenues rose 30% in constant-currency, a very big rate for company with $50 billion-plus in annual revenues. More importantly, the projected adjusted expense growth rate for 2019 fell from 45% prior, to 41%, a sign that margin stabilization will happen sooner than expected.
The Path Is Paved for Prices Above $200 in 2019
In the big picture, Facebook has tremendous long term growth potential through Stories ads, WhatsApp ads, and commerce. So long as the company executes on those opportunities and simultaneously stabilizes margins through moderated expense growth, Facebook stock is on track to hit prices well above $300 in the long run.
The math here is simple. Facebook’s share of the digital ad market has consistently grown every year from below 10% in 2014, to nearly 20% in 2018. This is mostly due to Facebook’s enhanced ability to monetize on the Facebook app, as well as the introduction of Instagram and Messenger ads. Over the next few years, that rate should continue to rise, mostly due to more robust Stories advertising and the introduction of ads on WhatsApp.
The digital ad market projects to be $520 billion by 2023, and I reasonably think that it hits $650 billion by 2025. Reasonably assuming Facebook captures 20-25% of that market, that leads to roughly $150 billion in revenues by 2025. Commerce revenues could easily push that number closer to $175 billion by 2025. But, to be conservative, I’m ignoring upside potential in commerce for now.
Meanwhile, margins are getting sliced right now, but they ultimately appear ready to stabilize around 40% as expense growth is moderating. Assuming Facebook can hit $150 billion in revenues by 2025 and stabilize margins around 40%, then the company could be looking at $17 in EPS in 2025.
Based on a growth average 20 forward multiple, that implies a fiscal 2025 price target for FB stock of $340. Discounted back by 10% per year, that equates to a 2019 price target of over $210.
Bottom Line on Facebook Stock
Facebook is back to being Facebook. That means Facebook stock is back to being a long term winner. Ultimately, while this stock has come very far, very fast in 2019, it was so beaten up in 2018 on illegitimate concerns that this bounce-back still isn’t over yet. Next stop? Prices above $200.
As of this writing, Luke Lango was long FB.
