Facebook (NASDAQ:FB) is down 2.6% so far this year. Already in 2021, Facebook stock is meaningfully trailing its internet-content peers.
From where I sit, Facebook remains a smart buy. Don’t get caught up in all the high-flying stocks such as GameStop. Instead, opt for a boring name that continues to print money like it’s the Federal Reserve.
Here’s why.
Facebook Stock Is Cheap
Before I get it into what the analysts think of Facebook, I want to say that long-term investors might want to put aside the advertising challenges it faces in the months ahead and instead focus on the bedrock of a business it runs.
“[W]e expect year-over-year growth rates in total revenue to remain stable or modestly accelerate sequentially in the first and second quarters of 2021. In the second half of the year, we will lap periods of increasingly strong growth, which will significantly pressure year-over-year growth rates,” Facebook said on its Jan. 27, Q4 earnings conference call.
Most business owners would gladly accept the challenge of beating robust quarterly earnings from a year earlier. The fact that Facebook was able to grow its Q4 revenue and earnings per share, excluding some items, by 33% and 52%, respectively, over a year earlier, should be welcome news for its shareholders.
Yes, it faces some regulatory issues in 2021. Still, ultimately, as InvestorPlace contributor Dana Blankenhorn said in mid-January, Facebook’s “Made in America” social-media platform isn’t going to be thrown overboard by the Biden administration anytime soon.
I totally agree.
In the 12 months that ended in December, Facebook generated $23.6 billion of free cash flow (FCF). Based on an enterprise value of $684.3 billion, it has an FCF yield of 3.5%. By comparison, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has an FCF yield of just 3.0% based on its $34 billion of FCF and its enterprise value of $1.13 trillion.
When a company has just grown its FCF by 11% in 2020 and 38% in 2019, it’s hard to get too worried about the uncertainty it’s facing.
Analysts Love Facebook
A total of 50 analysts cover Facebook stock. Of those, 39 rate it as a “buy“, four have an “overweight” rating on it, five have a “hold” rating on the shares, and just two rate it as a “sell.” The analysts’ median price target on the shares is $345, versus its price this afternoon of $265.
Credit Suisse analysts recently had good things to say about Facebook’s ad business.
“We expect ad pricing to take an increased role in Facebook’s revenue growth this year, particularly as the company had taken steps to ramp volume in tandem with engagement growth last year,” Credit Suisse wrote in a mid-January note about the company.
The firm has an “outperform” rating and a $325 price target on Facebook.
Over at Bernstein & Co., analysts Mark Shmulik and Nikhil Devnani also have an “outperform” rating on Facebook. They have a $350 price target on the shares.
In their Jan. 28 note, the analysts had many positive things to say about the company. They liked the fact that its ad sales had increased by more than 30% yea-over-year last quarter. Combined with the four percentage-point increase in its operating margin last quarter, that metric makes it hard not to like the company’s business.
Interestingly, they pointed out that Facebook’s “other” revenue jumped 156% YOY in the quarter to $885 million from $346 million. The jump resulted from increased sales of its Oculus 2 Quest virtual reality headsets, combined with the fees paid by developers to use its payments infrastructure.
The company’s 10-K SEC filing points out that its other revenues have grown by 118% over the past two fiscal years. They now account for 2.1% of Facebook’s overall sales. The analysts suggest keeping an eye on this line item, as they believe that it’s ready to grow exponentially.
I couldn’t agree more.
The Bottom Line
With so much excitement surrounding the GameStops of the world at the moment, it would be easy to lose sight of excellent investments for the long-haul.
If you’re interested in owning a stock that will definitely be around a decade from now, Facebook is a smart buy early in 2021.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
