Facebook (NASDAQ:FB) stock has had an incredible first half of 2021 despite analyst concerns.
The company enjoyed a healthy 27% run-up during the period. The regulatory threats against the company have gradually died down, and its sluggish revenue growth per user is showing signs of improvement.
Moreover, its advertising business faced fewer headwinds. FB stock is trading at a surprisingly reasonable valuation based on its stellar fundamentals and outlook.
FB stock has had a lot of momentum behind it and has outperformed the S&P500 returns in the past 12-months. It has returned a spectacular 39% to its stockholders, whereas returns from the S&P500 are roughly 35% in the past year.
Is also is trading at a reasonable 8.3 times forward sales. The stock is trading at a bargain based on its sparkling fundamentals, marked by a tremendous increase in revenues and cash flows.
In the second-quarter conference call, Facebook’s CFO, Dave Wehner, talked about how the company’s sales growth may slow down in the third and fourth quarters. He feels that revenues would drop sequentially as the company “laps periods of increasingly strong growth.”
He also pointed out that the company may face “increasing ad targeting headwinds” primarily due to the privacy changes to Apple’s (NASDAQ:AAPL) iOS in the third quarter. Analysts expect revenue growth to drop to 37% in the third quarter and 24% in the following quarter as a result. For the full year, though, they expect revenue growth to rise by 39%.
There is concern over its monthly active user (MAU) growth, though, which has been slowing down considerably. Roughly 50% of the world’s population uses at least one of its apps, but the rising average revenue per user will offset the slowdown in MAU growth.
This is why its revenue and earnings growth shot up significantly in the past couple of quarters.
Most of Facebook’s challenges in the next couple of quarters are short-term in nature, though. It will overcome its regulatory challenges, including the antitrust probes in the United States and Europe.
Furthermore, Facebook CEO Mark Zuckerberg has massive plans for the ‘metaverse’ which he believes could become the “next generation of the internet.”
The metaverse may reduce its dependence on ads and significantly expand its ecosystem beyond traditional communication devices.
The Risks Are Navigable
FB stock investors have probably heard about several risks that would compel them to reconsider their positions.
The most common risk that the bears take up is the impact of the rising competition on the company’s future. However, FB’s resources and willingness to invest in other platforms put these concerns to rest.
There is also the risk that the Federal Trade Commission (FTC) breaks up FB, which essentially undoes its acquisition of Instagram. This would break the two companies but make FB stockholders owners of two separate stocks trading at high multiples.
Additionally, there is always the risk of more regulatory action against the company based on new research reports or an opinion article on a reputable news agency.
For instance, the Wall Street Journal reported that the FB platform is toxic for teenage girls. These accusations aren’t new, though, and the company has always found a way to correct or marginalize them.
Bottom Line on FB Stock
Investing in FB stock comes with its fair share of risks, but it’s nothing that you should be worried about in the long run.
Facebook has built an incredibly defensible platform that is likely to perform at elevated levels for years to come. The metaverse concept is intriguing, and it will be interesting to see how it benefits Facebook and other social media platforms.
Moreover, FB stock trades at a surprisingly reasonable valuation which further adds to its bull case.
On the date of publication, Muslim Farooque 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
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
