With stock markets close to their all-time highs, the recovery of Facebook (NASDAQ:FB) stock seems to have been almost overlooked.
Trading close to $190, and just off recent highs. FB stock now has risen over 50% from its December lows, increasing its market capitalization by about $200 billion in the process.
In fact, FB is only about 15% away from retaking its all-time highs. Those were reached last August, just before the market value of Facebook stock plunged by the largest amount in history. In the context of that plunge – and the selling pressure that continued into December – the rebound of FB stock seems nothing short of miraculous.
The question now is whether the rally can keep going. That ,in turn, seems to require understanding why FB stock has soared 50%. At the moment, it looks like investors are betting on Facebook stock for reasons that go beyond the Facebook platform. As a result, the big gains of FB stock might not end anytime soon.
Why Has FB Stock Soared?
The bear case on FB stock seems easy, almost too easy. The endlessly negative noise plaguing the Facebook platform, starting with the Cambridge Analytica scandal and on through seemingly recurring privacy concerns, at some point will lead some users to abandon the website, the bears say.
That would be a real problem for Facebook, since the departure of some users, in theory, should lead other users to follow suit. For a social network like Facebook, more users lead to more users. Fewer users, then, should produce a snowball effect. That’s what happened to MySpace, which was displaced by Facebook. Any cracks in FB’s user base could allow a new competitor to do the same thing to Facebook.
There have been two real problems with that bear case in practice, however. The first, as I wrote back in late March, is that users don’t particularly seem to care about the company’s scandals.
The company’s daily active user base continues to rise, growing 8% year-over-year in the first quarter. And the second problem with the bears’ outlook is that Facebook stock no longer is based solely on the Facebook website. The company owns Instagram and WhatsApp, both of which have yet to be efficiently monetized.
And so the worst-case scenario for FB stock simply hasn’t played out. In fact, looking just at Facebook’s numbers in general and its revenue in particular, an investor might not even know there was anything to worry about. Its user base is still growing off a staggeringly large base; Facebook ended Q1 with 1.56 billion daily active users. Moreover, WhatsApp and Instagram are showing signs of progress and growth.
For all the noise, what should really matter to the owners of Facebook stock – the size of the Facebook platform’s user base and the opportunities of the company’s ancillary businesses – hasn’t really changed. It doesn’t mean that those who believed otherwise were silly. Rather, FB has proven to be much more resilient than its critics believed.
The Impact of “Less Facebook” on Facebook Stock
The bull case for Facebook stock, then, relies on the core platform staying resilient and the rest of its business growing.
CEO Mark Zuckerberg repeatedly has said he is focusing on protecting users’ privacy. If users have concerns – and many no doubt do – Zuckerberg is trying to assuage those concerns. At this point, Facebook doesn’t need to be revolutionary or miraculous; it simply needs to be safe and good. It certainly seems like the company is moving in that direction.
But it’s the moves outside the company’s main platform that are perhaps more interesting. Just this week, Facebook announced a redesigned app for Apple’s (NASDAQ:AAPL) iOS operating system. But it’s also adding a native Messenger clients for PC and Mac desktops. That’s part of the company’s effort to separate Messenger from Facebook , cementing the company’s positioning in messaging, not just social media.
That strategy has been going on for quite awhile now. Instagram clearly is copying features from Snap Inc’s (NYSE:SNAP) website, Snapchat. FB has also made a modest effort to challenge Match Group (NASDAQ:MTCH) in dating. Meanwhile, FB is using both Messenger and WhatsApp to gain exposure to the lucrative communications industry as well. And it certainly seems like that strategy – along with a stickier user base than the bears imagined – has boosted FB stock so far in 2019.
Can Facebook Stock Keep Rising?
The question at this point is whether FB’s strategy can get Facebook stock to $200 and beyond. Certainly, the idea that Facebook could offset some modest pressure on the namesake platform with efforts elsewhere has helped FB stock in recent months. But the problem at the moment is that FB stock is no longer cheap.
Even after backing out the company’s cash hoard, FB trades at about 25 times analysts’ consensus 2019 earnings per share estimates. FB’s earnings growth is likely to resume in 2020, as Facebook expects its 2019 spending spike – the same spike that tanked FB stock back in August – to moderate next year. So there’s room for Facebook stock to rise, but perhaps there’s not as much as room for FB to climb as when the stock was trading for under 20 times earnings not all that long ago.
That said, there’s a path for FB to rise. Wall Street analysts, on average, expect the company’s EPS to soar next year thanks to its lower spending. The consensus 2019 EPS estimate is just above $7; in 2020, the average EPS estimate is $9.32, representing 30%+ growth. FB stock – again backing out its cash – does trade at less than 20 times next year’s consensus outlook. Bump its EPS closer to $10, slap on a 20+ multiple, and Facebook stock gets to $240. That would be an all-time high for FB.
But what we’ve seen in 2019 is a clear change in sentiment towards Facebook stock. Users aren’t leaving, which has allowed investors and management to focus on the company’s opportunities beyond the core platform. As long as both those trends continue, FB stock should continue to rise.
As of this writing, Vince Martin has no positions in any securities mentioned.