Shares of global social media giant Facebook (NASDAQ:FB) slipped about 6% in late January after the company reported fourth-quarter numbers that, while ahead of expectations, didn’t beat estimates by as much as investors were hoping for considering the recent run-up in FB stock (shares were up nearly 20% in three months heading into the print). There were also some overarching concerns about slowing growth and compressing margins.
Zooming out, though, Facebook had a good quarter, slowing growth and compressing margin concerns are both overstated and ephemeral, strong catalysts remain in the pipeline, and the recent selloff in FB stock is simply another opportunity to buy the dip in a long-term winner.
All in all, I’m sticking with my call for the stock to hit $250 in 2020. Over the next few quarters, Facebook’s growth trajectory will remain robust. The company will consistently report better-than-expected numbers, and analysts will lift their forward profit estimates. At the same time, investor sentiment will improve, and the stock’s multiple will expand.
This combination of rising forward profit estimates and an expanding forward multiple will push FB stock higher in 2020.
The Negatives Are Much Ado About Nothing
In the big picture, Facebook’s quarter was very good, with the ostensible negatives from the print being overstated and ephemeral.
On the negative side, Facebook reported its slowest revenue growth rate since its IPO (25%). Revenue growth is expected to slow further to the low 20% range in the first quarter. Expense growth outpaced revenue growth, and operating margins slipped 4%.
But, when you break down those negatives, it becomes clear they are either overstated, ephemeral, or both.
A 25% revenue growth rate on a near $17 billion quarterly revenue base is impressive, and it’s actually good news that Facebook can sustain that level of growth, at such a huge scale, in such a competitive yet high-margin digital ad market. By the same logic, a low 20% revenue growth rate next year on a $70 billion-plus annual revenue base is even more impressive, especially considering it factors in regulation, privacy and ad-targeting headwinds.
So, slowing growth concerns are overstated. For all intents and purposes, this is a 20%-plus digital ad growth machine.
Meanwhile, expense growth did outpace revenue growth. But, if you strip out a $550 million legal fee, operating margins only compressed by 160 basis points, continuing a multi-quarter trend of margin stabilization. Next year, expenses are guided to rise only 20% (versus 50% growth this year). Revenues will likely rise by more than 20%.
Thus, in 2020, Facebook will get back to profit margin expansion, meaning that today’s margin compression concerns are both overstated and ephemeral.
Growth Drivers Remain Robust
While the negatives from the print are overstated and ephemeral, the positives are understated and enduring.
Facebook doubled its number of Stories advertisers in just one year from 2 million to 4 million. That’s impressive. It speaks to Facebook’s abilities to adapt its platforms to changing consumer behaviors, and consequently sustain dominance in the digital ad market. Over the next few years, Stories engagement should continue to rise. As it does, Facebook will grow the number of Stories advertisers from 4 million to 8 million (which is the number of advertisers in the entire Facebook ecosystem today).
Concurrently, Facebook is in the early days of monetizing its private messaging apps, Messenger and WhatsApp. Both of these apps have over a billion active users. Both are also largely un-monetized. Today, Facebook is testing things like direct ads and click-to-messaging ads in Messenger and WhatsApp. According to management, these early tests are yielding promising results. Over the next few years, Facebook will more aggressively roll out advertising opportunities in both of these apps, and add tons of firepower to its digital ad growth narrative.
Also at the same time, Facebook is pushing into the e-commerce world. Through initiatives like WhatsApp Payments, Facebook Marketplace, Instagram Shopping and Facebook Pay, Facebook is attacking the ecommerce world through multiple angles. Some of these initiatives won’t work. Some will. Over the next few years, Facebook will replicate what works across its entire ecosystem and significantly expand its reach into the e-commerce space from zero today, to sizable penetration by 2025.
Facebook Stock Remains Undervalued
Considering the company’s muti-faceted and enduring growth drivers, Facebook stock is significantly undervalued today.
Simply consider the following. This is one of the two biggest companies, in a digital ad market growing at a double-digit pace, with room for significant digital ad market share gains through WhatsApp and Messenger ad real estate expansion, and with even more room for growth through new e-commerce verticals. At the same time, operating margins are already at an enviable 34%, and those margins will only go higher as expense growth moderates.
Net net, you’re talking about a sustainable 15%-plus revenue grower with sizable upside margin drivers. That’s the kind of growth profile that lends itself to sustainable 20%-plus profit growth. That’s far above the tech sector’s average projected long term earnings growth rate of 13%. Yet, FB stock trades at just 22-times forward earnings, which is in-line with the tech sector’s average forward earnings multiple.
So, with Facebook, you’re paying the same multiple, for much bigger growth prospects. Seem like a good catch? It is. According to my numbers, the stock will run to $250 this year.
Bottom Line on FB Stock
Facebook’s post-earnings drop is overdone. Yes, growth is slowing. But, there’s a ton of growth potential here through WhatsApp and Messenger ad real estate expansion, continued Stories ad build-out, and new ecommerce verticals. Meanwhile, margins are compressing. But, expense growth rates are going to start moderating. As they do, Facebook will get back into margin expansion mode in 2020.
All in all, then, the Facebook growth narrative remains robust. And FB stock remains cheap. This combination means that the selloff in Facebook is an opportunity, and that shares have runway to $250 in 2020.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities, but may initiate a long position in FB within the next 72 hours.
