Cash Burn Aside, Facebook Stock Is a Buy on the Dip

Now, more than seven years removed from its initial public offering, Facebook (NASDAQ:FB) should be on its way to maturity among technology names. Facebook stock surely should be more stable as well.

Cash Burn Aside, Facebook Stock Is a Buy on the Dip

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In this case, “maturity” means avoiding some of the public relations snafus, such as data breaches, allegations of one-sided political views and smug Congressional appearances by top executives, that have dogged the company.

For example, Facebook was recently hit with a $100 million fine from the Securities and Exchange Commission (SEC) for the company’s role in the Cambridge Analytica data scandal. By some accounts, Facebook knew of the potential issues with Cambridge Analytica as far back as 2015.

“The $100 million fine that Facebook Inc. agreed to pay last month over claims that it misled investors about business risks tied to Cambridge Analytica’s use of account holders’ private data wasn’t supported by all of the members of the U.S. Securities and Exchange Commission,” reports Bloomberg.

For Facebook, with a market capitalization of nearly $527 billion, a $100 million fine is immaterial, particularly when accounting for the company’s $10.45 billion in free cash flow at the end of the second quarter. The point isn’t the money. The point is owners of Facebook stock would like the investment thesis to be tried in the court of financial markets, not the court of public opinion.

FB Stock Still Worth a Look

Down almost 10% this month, Facebook stock resides about 13.1% below its 52-week high, putting the stock in correction territory. While past performance is not guaranteed to repeat, financial markets have a funny way of embracing repetition and that’s relevant with Facebook because previous dips of comparable magnitude to the current one have been buying opportunities.

That includes the May through early June decline this year, last year’s fourth-quarter tumble and some other dips over the course of Facebook’s life as a public company. In other words, Facebook maintains credibility as a story stock with plenty of avenues for growth. Of course, Facebook stock is supported by the company’s status as the world’s largest social media firm.

According to Morningstar:

“Facebook is the largest social network in the world, with more than 2 billion monthly active users. The growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers in the short and long term. The combination of these valuable assets and expected continuing growth in online advertising bode well for Facebook, as the firm generates strong top-line growth and remains cash flow positive and profitable.”

Along with the core Facebook product, Instagram, Messenger, and WhatsApp drive user engagement and are among the most popular mobile apps on both major mobile operating systems, prompting the company to explore new ways of monetizing those platforms.

Facebook’s ability to execute on that front should provide more value for advertisers, which is crucial at a time when many traditional companies are complaining they are not getting the expected bang for their buck from advertising on new-age platforms.

“As usage of messaging apps on mobile devices continues to increase, the firm will be using bots within its Messenger app to place native ads and create brand interaction for users and brand names, possibly resulting in higher ROI for advertisers,” according to Morningstar.

Bottom Line: Growth at a Reasonable Price

Facebook’s growth story is very much intact and with the stock trading around 23.3x forward earnings, investors aren’t paying excessively for the privilege of that growth. One reasonably could argue that 23.2x earnings is fair valuation for a company that is growing return on assets (ROA) and return on equity (ROE) in a fashion comparable to Facebook.

If there is a quibble with Facebook stock it is that the company is spending a lot of money and the aforementioned free cash flow, while still tidy, is declining as a result. From 2014 through 2018, Facebook’s average annual capital expenditures were $5.9 billion, but last year, that figure swelled to $13.9 billion and it could easily top $15 billion or more this year.

Markets usually don’t mind when growth companies spend. It’s expected, but eventually, that spending needs to materialize into top- and bottom-line benefits.

Todd Shriber does not own Facebook stock.

Article printed from InvestorPlace Media,

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