To say that Facebook (NASDAQ:FB) stock didn’t deserve to fall during the coronavirus pullback would be false. The business is being impacted and therefore, FB stock underwent a correction.
Did that justify a 38.8% peak-to-trough decline? No.
Even with shares still down more than 26% from its 2020 highs, one could make an argument that Facebook is a buy for three reasons. The balance sheet is robust, engagement is up and Facebook remains a dominant player in the social media space, with immense profitability.
That said, the company will see a negative impact from lower ad sales.
FB Stock and Coronavirus
When there’s an economic downturn, digital advertising takes a hit as companies slash their marketing budgets. Even if that has a negative impact on revenue, these companies are cutting costs first and asking questions later. They are in survive mode, not thrive mode, as COVID-19 forced the global economy to slam on the brakes.
The hope is that this brake check is temporary and not prolonged. However, there’s a silver lining for digital advertising revenue channels. That is, engagement is up.
Facebook acknowledged that engagement is through the roof. In the same breath though, the company also said that this increased engagement is in channels that are tough to monetize. While increasing revenue would obviously be preferred, it’s hard to be too upset that the company is seeing a massive increase in usage.
Similar impacts are occurring with Twitter (NYSE:TWTR) and Pinterest (NYSE:PINS). To me, that sounds like short-term pain for long-term gain.
Potent Balance Sheet
For many investors looking at a bear market, they want to be in the companies with the strongest balance sheets. Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and others get all the credit, but conveniently, FB stock is often forgotten.
That’s despite the company carrying no long-term debt and an incredible $54.8 billion in cash and short-term investments. Facebook has $900 million in current debt.
Current assets of $66.2 billion obliterate current liabilities of $15 billion. Total assets of $133.4 billion are more than four times the $32.3 billion Facebook has in total liabilities. My friends, these are not normal ratios for any public company. In fact, they are better ratios than the always-loved Google and Microsoft.
One could argue that FB stock is a buy based solely on its balance sheet.
Deeper Dive on Facebook
Here’s what we have thus far. Facebook has one of the best balance sheets in the stock market, but its business is being negatively impacted by COVID-19 as digital ad spending dries up. The plus side to the situation is that usage is up for Facebook, Instagram, WhatsApp and its other platforms. The hope is that these users stick around (although use time will inevitably decrease as the public goes back to work), and the company can increase revenue as a result.
While all of that is great, I think many people forget just how profitable Facebook is. While Twitter, Snap and others have had trouble gaining traction with their income statement, FB stock has not. Facebook is incredibly profitable, boasting gross and operating margins of 83.4% and 33.9%, respectively.
The tough part here is trying to estimate Facebook’s numbers this year. Analysts currently expect revenue to grow about 14% to $80.8 billion and for earnings to jump 28% to $8.23 per share. Who knows how accurate that is, because we don’t know what type of downturn we may be facing.
The Bottom Line
This next sentence will seem somewhat taboo in the investing space but, it doesn’t matter what Facebook’s numbers are for fiscal 2020.
There, I said it. At the end of the day we’re talking about one of the strongest balance sheets in the public markets with one of the most profitable business models on earth. FB stock has traded anywhere from a 38% discount to a current 25% discount amid the coronavirus selloff.
Shares trade at roughly 20 times this year’s earnings estimates. That figure is somewhat fluid given the situation, but we’re not talking about 50 or 60 times profit here. This is a reasonable valuation — cheap even — given the other attributes Facebook holds. Use the dip to your advantage.
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.
