Facebook (NASDAQ:FB) stock is down more than 5.4% in the past month. It has also lagged the S&P 500 index overall in the past year despite putting up some incredible growth numbers. FB stock is up less than half of the gauge’s 33.4% 12-month gain.
Facebook puts investors in a difficult situation. As a recent whistleblower pointed out, the core business may be harming society. Obviously that’s not good. Yet as harmful as it may be, Facebook’s business is absolutely booming. It’s showing no signs of slowing down. For investors, FB stock is also incredibly undervalued, although some may argue it’s a value trap.
Here’s a look at why Facebook, with its $915 billion market capitalization, is the cheapest megacap tech value stock at the moment.
FB Stock by the Numbers
No matter how you look at it, FB stock is putting up some mind-boggling numbers. During the 2020 pandemic, when other companies were struggling for survival, Facebook was raking in the cash. Facebook reported revenue in 2020 was up 21.6% while net income hit $29.1 billion for the year. The company is due to report earnings later today, after the markets close. The average estimate for the September quarter is for revenue of $29.58 billion.
Some skeptics said Facebook simply benefitted from a rise in social media engagement during pandemic economic shutdowns. They pointed out that FB stock would face impossible year-over-year comparisons in 2021. Instead, Facebook’s growth has accelerated this year. Last quarter, the company reported 55.6% revenue growth and said its net income more than doubled from a year ago.
Meanwhile, FB stock is trading at just 21.2 times forward earnings and has a price-to-earnings-to-growth (PEG) ratio of just 0.88. Those valuation metrics are lower than Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT) and Netflix (NASDAQ:NFLX). Incredibly, they are roughly in-line with the S&P 500 average as a whole. In fact, during a period of extreme earnings multiple expansion across the entire market, the earnings multiple of FB stock is down 45% in the past five years.
Facebook’s Investor Sentiment Problem
The biggest problem with FB stock isn’t its growth, profitability or valuation. It’s investor sentiment. Facebook has several problems that continue to spook investors.
First, Facebook’s business has a perception problem. Social media use has been linked to depression, anxiety, conflict and even certain physical ailments.
The recent Facebook whistleblower alleged that Facebook knowingly promotes content designed to create conflict. She said the company puts profits and engagement over user health and safety, as well as the overall good of society as a whole. Former Facebook employee Frances Haugen is due to tell all to a British Parliament panel on online safety this week.
This argument that Facebook’s platform is destructive and bad for people is somewhat weak, in my opinion. I agree that social media is a cancer on society. But tobacco companies literally create cancer in society. Oil companies, gambling companies, alcohol companies and even big banks and tech companies can all be accused of harming society in the name of profits. But in a free economy, consumers — that is, Facebook users — are free to spend every waking hour harming themselves on social media. Just because Facebook’s platforms are harmful doesn’t mean the stock is a bad investment.
Regulatory Risk
The other risk factor spooking investors is the prospect of government intervention. If the government cracks down on Facebook’s business or content in a meaningful way, all those profits and all that growth could dry up.
I’m always skeptical about the potential for meaningful U.S. government crackdowns on big business. Nothing ever seems to happen in Washington unless someone stands to make a profit. Big tech companies spend billions of dollars on lobbying and political donations. If Facebook’s business model is crippled by new regulations, nobody in Washington makes any money from that change.
Lawmakers will continue to hold hearings and make pledges of big tech “crackdowns.” But those headlines have been and will continue to be more about generating publicity than about making meaningful change. If government officials do anything to “crack down” on Facebook, they will probably issue a slap-on-the-wrist fine or two.
How To Play FB Stock
In the long-term, business fundamentals always trump investor sentiment. Facebook may not ever trade at the same valuation multiples as its $20o billion-plus megacap tech peers, and that’s ok. Apple hasn’t traded with a growth stock multiple for over a decade. As long as Facebook continues to innovate, grow and profit, FB stock will continue to rise.
If you understand the risks associated with FB stock, now is a great time to buy the dip ahead of what will certainly be another big quarterly earnings report.
On the date of publication, Wayne Duggan held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
