Facebook (NASDAQ:FB) stock popped above $200 again after the social media and digital advertising giant reported strong first-quarter earnings that exceeded expectations.
Specifically, Facebook’s first-quarter revenues, earnings, and usage all topped estimates. Management also said that April ad spending trends were stabilizing, a welcome piece of news for investors amid the novel coronavirus pandemic.
Zooming out, Facebook stock is a long-term winner. First-quarter earnings simply confirmed that. This company isn’t just weathering the Covid-19 storm – Facebook is largely beating it, and is positioned for a quick recovery once the storm passes.
I continue to believe that FB stock is one of the best stocks to buy both amid the coronavirus pandemic, and to play a strong second-half economic recovery. This bullishness derives from five key points:
- Facebook is the world’s digital town hall, and the coronavirus pandemic is only emphasizing this reality.
- Stabilizing ad spending trends in April confirm that Facebook has a best-in-breed ad ecosystem which marketers are hesitant to pull money from, even in a global economic shutdown.
- Management remains relentlessly innovative, and new products/services will only boost Facebook’s positioning as the world’s digital town hall and most valuable advertiser.
- Facebook continues to flesh out its e-commerce business, and that business has huge upside potential over the next few years.
- FB stock remains attractively undervalued both relative to peers and relative to the company’s growth potential.
Digital Town Hall
I’ve said it before and I’ll say it again because it’s becoming more obvious than ever amid the coronavirus pandemic: Facebook is the world’s digital town hall.
In the first quarter, 3 billion people logged onto and used either Facebook, Instagram, Messenger, or WhatsApp every month. About 2.3 billion of those people used one of those services every single day.
Only 4.5 billion people in the world have internet access.
In essence, that means that nearly 70% of the world’s internet population is plugged into the Facebook ecosystem every month, and more than 50% are plugged in every day. Basically, if you have the internet, you’re on Facebook.
For the foreseeable future, Facebook will continue to leverage its utility-like properties to drive steady user growth.
The coronavirus pandemic has reinforced the idea that, because of its 3 billion global user reach and unparalleled targeting capabilities, Facebook is a best-in-breed advertising platform which will be the last platform marketers cut from their ad budgets.
The numbers speak for themselves here.
Facebook’s ad revenue trends declined steeply in March. But, in April, they stabilized. April ad revenues came in flat year-over-year. Flat revenue growth against the backdrop of a global economy in lock-down and a U.S. economy shrinking at a 10%-plus pace is very impressive.
The Covid-19 situation and economic backdrop will only improve from here. As conditions do improve, Facebook will return to positive revenue growth for the rest of 2020, and likely get back to 20%-plus revenue growth by the second half of 2020.
Importantly, CEO Mark Zuckerberg emphasized on the conference call that – because Facebook has the resources and abilities to do so – the company will continue to invest and innovate during this turbulent era.
That’s important because it means that Facebook will only extend its leadership position in the digital world.
That is, many other companies are being forced to cut back on investment levels amid the global economic shutdown. But Facebook’s business remains resilient, and the company has $60 billion in cash on the balance sheet. Thus, Facebook has the resources and abilities to keep investing.
More investments will lead to more products and services, like new video and commerce products. Those new products and services will expand the value prop of the Facebook ecosystem, which will in turn drive more user growth, and attract more ad dollars to the platform.
Facebook’s ability to keep investing amid the coronavirus pandemic positions the company for a dominant future once this storm passes.
Huge E-Commerce Upside
One of the verticals which I’ve been most excited about when it comes to Facebook’s long-term growth potential is e-commerce.
The idea is simple. Half of the internet world uses a Facebook product every day. Pretty much every business is on Facebook, too. There exists a huge opportunity for Facebook to connect all those users, to all those businesses, and become the world’s largest shopping marketplace. The revenue opportunities from building that marketplace are diverse, including commissions from native payments and promoted in-app shopping ads.
On the first-quarter call, Zuckerberg confirmed that Facebook continues to make meaningful progress on this vertical.
The company recently partnered with Jio to enable e-commerce opportunities for WhatsApp in India. Facebook also continues to roll out things like catalogs in WhatsApp, develop native payment capabilities, and build out new messaging ad formats for small businesses to bring consumers directly to messaging feeds.
All together, Facebook continues to push forward on its e-commerce business. One day, this business could be really big.
Facebook Stock to $250
The best thing about FB stock is that it’s attractively undervalued, both relatively and absolutely.
On a relative basis, FB stock’s 28-times forward earnings multiple is the second lowest forward earnings multiple in the widely followed FAANNG group. Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Nvidia (NASDAQ:NVDA), and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) all trade at higher forward earnings multiples. Only Apple (NASDAQ:AAPL) trades at a lower forward earnings multiple.
Yet, Facebook’s revenue growth rate last quarter was the third highest in the group. Over the next five years, Facebook’s annualized expected earnings growth rate (20%) is also the third highest in the group, according to YCharts.
In other words, FB stock is unreasonably cheap relative to peers.
On an absolute basis, I see Facebook growing profits to roughly $18 per share by 2025. Based on a 20-times forward earnings multiple and a 10% annual discount rate, that equates to a 2020 price target for FB stock of nearly $250.
The Bottom Line on FB Stock
Facebook stock offers investors big growth at a discounted price.
Sure, the coronavirus pandemic is a big risk for the company. But Facebook’s earnings imply that the company is weathering the storm with impressive resilience, and that the worst is behind them. If so, then Facebook’s combination of big growth and discounted valuation will continue to power FB stock higher for the rest of 2020.
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 recognized as one of the best stock pickers in the world 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, AMZN, and NFLX.