So far in 2021, it’s been a rough ride for high-growth tech stocks like Facebook (NASDAQ:FB) stock. The Dow Jones Industrial Average is up 8% year-to-date. Unfortunately for FB stock investors, the social media giant lagged behind the Dow for most of the year.
I don’t know if the near-term rotation from tech stocks to growth stocks will continue for weeks or months. But for investors looking for long-term investments to buy and hold, FB stock is quite literally in a league of its own.
FB Stock Screen
I’ve been bullish on FB stock for a while. Back on April 16, I wrote about how Facebook was a quarantine winner. In less than a year since that article was published, FB stock is up 60%.
I hadn’t thought much about Facebook lately until I tried to set up a specific screen to look for stocks to buy. I’m a value investor at heart. So, I wanted to see if I could find some growth stocks that still have compelling valuations. After all, the S&P 500 is at all-time highs. Its Shiller price-earnings ratio is also at its second highest level in history.
Here’s a rundown of the screen I ran on Finviz. I wanted to look for large cap stocks that have generated at least 30% annual revenue growth over the past five years. Looking ahead, I screened for stocks projected to grow earnings per share by at least 20% annually over the next five years. In terms of value, I screened for stocks with forward P/E ratios under 25. I also wanted stocks with healthy balance sheets, so I screened for stocks with long-term debt-equity ratios of under 0.1.
Incredibly, the screen returned only one stock. As I’m sure you can guess, the only stock that meets those simple criteria is FB stock.
I’m apparently not the only one to recognize the bullish outlook for FB stock. The 44 analysts that cover FB stock have an average price target of $350, suggesting about 20% upside over the next 12 months.
Bank of America analyst Justin Post is among the FB stock bulls. He says one of the stock’s biggest potential growth catalysts is its e-commerce opportunity.
“Facebook is still in the early stages of in-app checkout capabilities for certain dynamic Facebook/IG ads, though long-term we see continued initiatives in the category as unlocking a sizeable opportunity,” Post says.
In February, Shopify (NASDAQ:SHOP) announced its “Shop Pay” payment option will be added to all users selling on Facebook’s main platform and its subsidiary Instagram.
“We remain constructive on several under-monetized and under-valued FB assets (FB/IG Checkout, Messenger, WhatsApp, Watch, & Reels) to drive growth post-2021,” Post says.
Bank of America has a “buy” rating and $358 target for FB stock.
CFRA analyst John Freeman says FB stock will be a long-term winner of the secular shift of more than $700 billion in global advertising spending from offline to online.
“We also see upside potential from WhatsApp (presently no monetization effort) and Oculus AR/VR goggles and app development platform, sales of which approached $1B in Q4 ‘20, boosting FB’s total Y/Y growth by 2% to 33%,” Freemans says.
CFRA has a “buy” rating and $320 price target for FB stock.
How To Play It
FB reminds me a lot of my largest personal investment, Alibaba (NYSE:BABA). Facebook’s business is booming. In the middle of a global pandemic, Facebook reported 21.6% revenue growth and 57.6% net income growth in 2020. Alibaba reported 35.2% revenue growth and 70% net income growth in 2020.
Like BABA stock, FB stock is somehow still a compelling value at 20.8x forward earnings. BABA stock trades at just 19x forward earnings.
Like Alibaba, Facebook’s biggest bear case has nothing to do with its business or its growth numbers. Alibaba is facing headwinds over concerns it will be delisted from U.S. exchanges. The Communist Party of China is also cracking down internally on big tech companies and Alibaba founder Jack Ma specifically.
The biggest risk for FB stock is that global regulators will make an example of the largest social media company in the world. Whether it be antitrust scrutiny, content regulation or data collection restrictions, Facebook will likely continue to face headline risk in the near-term.
I have no idea what’s going to happen with Alibaba or Facebook in the near-term. But I’m holding my BABA stock for the long term. My thesis is that political pressures and headlines are temporary. A growing business and an undervalued stock make for an excellent long-term investment thesis.
When it comes to growth and value, FB stock is in a league of its own.
On the date of publication, Wayne Duggan held a long position in BABA. He did not (either directly or indirectly) hold any other positions in the securities mentioned in this article.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market.