Facebook Begins to Climb a Wall of Worry

Facebook (NASDAQ:FB) reported an excellent second quarter on July 28. However, despite beating the analyst estimates on both the top and bottom line, FB stock was down more than 4% the day after its earnings announcement. 

A person using the Facebook app on a smartphone
Source: Wachiwit / Shutterstock.com

Investors are worried that the company’s admission growth will slow significantly in the second half of the year. As a result, the climb up the wall of worry begins. 

Facebook’s stock was up more than 30% year-to-date even with the day-after-earnings hangover and 62% over the past year through July 28. A $10,000 investment in its May 2012 IPO is worth $94,211 a little more than nine years later. 

During this time, Facebook founder and CEO Mark Zuckerberg faced a lot of issues. Fortunately, a temporary slowdown in growth is not a new phenomenon for the Harvard dropout. 

Patient investors will be happy to see it retrace some of the stock’s 2021 gains so that they might buy more for less in the coming weeks. 

Long term, I don’t think there’s any question Facebook remains a buy. Here’s why.

Analysts Love FB Stock

A total of 51 analysts cover FB stock. To get a perfect score from Wall Street, it needs 255 points. That’s 51 analysts multiplied by 5 points per buy rating. At present, it gets a score of 231 or 91% of a perfect score. So it’s a big buy, up from 90% a month ago.  

Morgan Stanley analyst Brian Nowak rates it a “buy.” Nowak upped his target price by $25 to $400 on the news. 

“FB’s 56% Y/Y 2Q ad revenue growth was ~1% better than we modeled but light of lofty buy-side expectations following out-sized beats at SNAP, TWTR and in particular GOOGL,” StreetInsider reported Nowak stated in a note to clients. 

The analyst argued that the company has got to deliver on some of its growth initiatives like Facebook Shops for the stock to continue moving higher. Nevertheless, he characterized the company’s quarter as “solid.”

Credit Suisse analyst Stephen Ju upped his target price to $500 ($20 boost) while maintaining his “outperform” rating. He pointed out that free cash flow (FCF) growth could accelerate as it finds its sea legs in content screening and security. 

Wu believes that the company still has plenty of monetization irons in the fire. Analysts are underestimating this potential.

What About Shopping?

As Novak pointed out, Facebook has to deliver on its shopping initiatives. It’s been over a year since it launched Facebook Shops

In June, the company added Facebook Shops on both WhatsApp and the Facebook Marketplace. It did this to expand its e-commerce reach beyond the main Facebook page and Instagram. 

“Today, there are more than 1.2 million active Shops on the platform. With this success, Facebook is now allowing business owners to bring their products to WhatsApp, as well as to Facebook Marketplace, which has a monthly visitor count of over $1 billion,” TipRanks contributor Dilantha De Silva wrote July 11.

In the company’s Q2 2021 conference call, Nowak asked about its shopping efforts. 

Nowak wanted to get some more clarification on Zuckerberg’s comments that its e-commerce efforts were going to take a while before it’s a meaningful part of Facebook’s overall business. Zuckerberg responded that he meant that the company’s ad business is so huge, it’s going to take some time to really move the needle from a revenue standpoint. 

In other words, Zuckerberg and the company will continue to tinker with Facebook Shops until it’s a home run for merchants. When that happens, you can be sure the revenue will be in the many billions.  

If nothing else, Mark Zuckerberg is incredibly patient. 

He also spent some time during the conference call discussing the metaverse and how it will be one of the most exciting projects he and the rest of the Facebook team will work on in their careers. 

But like Facebook Shops, it’s going to take time. 

The Bottom Line

Over the past four quarters through June 30, Facebook had FCF of $31.5 billion, 30% higher than its trailing 12-month FCF of $24.2 billion at the end of March. 

So, even with its strong showing in 2021, Facebook’s FCF yield is a reasonable 3.1%. Given its FCF growth, any letdown in its share price is an opportunity to buy its stock at a more attractive FCF yield. 

If you own FB stock, I would be cheering for the wall of worry to keep getting higher. But, ultimately, Zuckerberg will find a way over it.    

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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.

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