Why Facebook Stock Is Compelling on Coronavirus Weakness

Facebook is a high-quality, long-term winner, trading at a huge discount because of temporary headwinds

Shares of social media and digital advertising giant Facebook (NASDAQ:FB) have plummeted over the past six weeks on concerns that the rapidly spreading novel coronavirus will kill digital advertising globally for the foreseeable future. FB stock is consequently down about 30% from its mid-February highs.

FB Stock: Facebook Is Compelling on Coronavirus Weakness
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These concerns are completely rationale. The coronavirus pandemic has brought the economy to a screeching halt. Consumers aren’t going out. They aren’t spending money on things outside of consumer staples. If consumers aren’t spending as much on discretionary items, why would advertisers continue to advertise as much to those consumers?

They won’t. They’ll cut their ad budgets. Ad spending trends will deteriorate. And Facebook’s growth trajectory will flatten out.

All of that makes complete sense. And yet, it also makes complete sense to buy the dip in Facebook stock today. For five big reasons:

  1. The coronavirus pandemic won’t last forever. Modeling suggests that “peak coronavirus” is a few weeks away, while spread will hit near-zero by May or June.
  2. Facebook will weather the slowdown better than peers. As a big digital ad platform, Facebook should increase its share of ad dollars during the pandemic.
  3. Ad spending trends will rebound in the second half of 2020 and into 2021. The economy will normalize and rebound in the back-half of 2020, once the virus is contained, which will lead to a rebound in digital ad spending trends.
  4. Facebook stock is ridiculously cheap. At 18-times forward earnings, FB stock is about as cheap as it gets for a 20%-plus revenue grower with big profit margins.
  5. Upside potential over the next few months is very high. Even after taking down my revenue and profit projections for the company, I still see FB stock rallying above $200 before the year is out.

Coronavirus Headwinds Are Temporary

The coronavirus is a big, scary and volatile crisis. But, social distancing works in thwarting the spread of the virus. See China, South Korea, Japan, Iran and Italy.

Assuming countries across the globe maintain strict social distancing measures, then current modeling projects that the coronavirus pandemic will peak in mid-April, and be largely stomped out by late May or early June. Thus, by the summer of 2020, coronavirus-related economic headwinds will be largely in the rear-view mirror.

Facebook Will Weather the Storm

During the coronavirus outbreak, Facebook is better positioned to weather the storm than peer digital ad platforms.

That’s because, next to Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) Facebook is one of the biggest digital ad platforms in the world, with unparalleled reach and a long track record of delivering outstanding ad spending returns. Amid this pandemic, as advertisers cut back on spend, they will cut back spend more-so on smaller, less established digital ad platforms. Facebook ad budgets will be cut less.

Consequently, thanks to its size and incumbency, Facebook’s revenue trends should only be marginally impacted during the pandemic.

Ad Spending Trends Will Rebound

There is ample fiscal and monetary stimulus to propel a rebound in the U.S. economy once the virus fades, especially if it fades by the summer (as current modeling suggests it will). There is also ample pent-up consumer demand to propel a huge rebound in consumer discretionary spend once the economy does normalize.

Thus, by the summer of 2020, the U.S. economy should be largely back to normal, and consumers should be out and about, spending big on discretionary items.

Against that backdrop, advertisers will aggressively re-up their ad budgets, and Facebook’s growth trends will meaningfully recover.

Facebook Is Too Cheap

At present, FB stock trades at just 18-times forward earnings estimates.

For a stock of this caliber, that’s dirt cheap. Facebook is a consistent 20%-plus revenue grower, with 80% gross profit margins and 30%-plus operating profit margins. The company also has a huge moat in the form of four social media apps, each with 1 billion or more users, and holds a dominant position in the secular growth digital ad market.

Stocks of that caliber usually trade at 25-times or 30-times forward earnings. Indeed, Facebook’s average forward earnings multiple over the past five years is 26.

Upside Potential Is Huge

I have revised my forward revenue and profit estimates sharply lower for Facebook in light of the coronavirus pandemic, including cutting revenue and profit estimates in every year from fiscal 2020 to fiscal 2025.

Still, I see Facebook growing revenues at a steady 15% clip over the next five years, alongside gradual margin expansion and 15%-plus profit growth, with all of that powered by secular digital ad spending tailwinds and Facebook’s increasingly dominant position in that market.

Assuming so, I still see Facebook earning $16 per share in 2025, versus $18 previously. Based on a 20-times exit multiple and a 10% annual discount rate, that equates to a 2020 price target for FB stock of over $200.

Bottom Line on FB Stock

Facebook is a high-quality, long-term winner, that is trading at a substantial discount to fair value because of temporary headwinds. These headwinds should largely disappear by the second-half of 2019, and reinvigorated growth should propel the stock meaningfully higher during that stretch, towards $200-plus levels.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long FB. 

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/facebook-fb-stock-compelling-coronavirus-weakness/.

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