Oddly enough, a lot of investors are trying to bottom-pick distressed stocks amid the coronavirus selloff. Cruise stocks, airlines, energy companies — you name it. But why not focus on a higher-quality company like Facebook (NASDAQ:FB), with FB stock suffering a 38% decline from peak to trough?
There are different forces at play, with the virus dramatically altering the public’s everyday life.
On the one hand, social media platforms are seeing a surge in usage. We know this because of what Twitter (NYSE:TWTR) said just the other day. The same goes for Pinterest (NYSE:PINS). Daily active users are up, and so we can infer usage of Facebook, Instagram and other platforms has risen as well. On the downside though, Twitter also warned about its guidance, as the spread of the virus weighs on ad spend.
That makes sense, right? With millions temporarily out of work and who knows how many retail locations closed down, one would expect ad spending to go down. That hurts Facebook and other social media companies. However, I view that as a short-term cost for acquiring so many active users as millions sit in quarantine.
Short-Term Cost vs. Long-Term Gain
Not every user will remain a regular user once the virus’s spread begins to slow and people get back to regular life. However, many will stick around and that will be a boon for social media once ad spending comes back.
A few quarters to perhaps a fiscal year of subpar financial results may well be worth the trade once the world gets things back in order. Why? Simply because digital ads are a more effective way for companies to reach their customers. That fundamental truth won’t change, whether we’re in a recession or not. Eventually, Facebook, Twitter, Pinterest and others will feel the positive effect from that realization.
Some investors may not care for Facebook as a company. They may dislike social media or feel that it plays too much of a role in society. That’s a fair take. The other side of that is, Facebook & Co. provides a great way for people to stay in touch with one another, whether that’s from across town or across the country.
That, and Facebook is insanely profitable.
The Financials Are Strong
FB stock boasts trailing gross margins north of 80%, with net profit margins above 26%. In essence, 26% of its top-line sum results in net income for the company. As users grow, so too does Facebook’s reach, and thus, its potential future revenue.
Analysts expects sales to grow 20% this year to $85 billion. That figure may not be within reach this year because of lower ad spending, but it goes to show a bit of what’s to come with this stock once the coronavirus slowdown unwinds.
Again, full-year earnings estimates of $8.99 per share may not be accurate at this time. In fact, as investors, we have to assume that they are not accurate. But at 16.5 times those earnings, we’re looking at a stock that’s pretty darn cheap.
Go a step further, though. Realize that in the trailing 12 months, FB stock generated $21.2 billion in free cash flow. Total cash and short-term investments of $54.8 billion give the company complete flexibility to weather the storm, no matter how long it lasts.
Long-term debt totals less than $1 billion, while current assets of approximately $66 billion are more than four times the size of current liabilities of $15 billion. Total assets to total liabilities maintains a similar ratio.
Put simply, FB stock has one of the strongest balance sheets in the entire market, and that’s going underappreciated right now.
The Bottom Line on FB Stock
Facebook was here before the coronavirus and it will be here after it’s gone. Ad spending may fluctuate over the next few quarters, but the long-term trend is here to stay.
With one of the strongest balance sheets on Wall Street, Facebook has plenty of firepower to outlast any downturn.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.