Facebook, owned by Meta Platforms (NASDAQ:FB), makes 97.5% of its revenue from digital advertising, according to its latest quarterly report. This is not going to change very much, metaverse or not. In fact, a study by a major digital advertising research firm recently confirmed digital ads are a solid growth market. As a result, FB stock now looks like a serious bargain for most value investors.
This is because the stock has been weak lately, providing a discounted entry point for concerned investors. For example, from a peak of $382.18 as of Sept. 7, FB stock was at $325.45 as of Dec. 20. That represents a drop of $56.73 from the peak and a decline of 14.8%.
Granted, this is not the trough. Meta Platforms stock is up from $306.84 as of Dec. 3. That seems to have been the bottom for the stock.
Moreover, I suspect analysts realize this is not too much to fear or worry about, with respect to the company’s “metaverse adventure.” The truth is that its powerful digital advertising revenue is not likely to decline dramatically from here.
The GroupM Research Report on Digital Advertising
The Financial Times newspaper reported on Dec. 6 that ad-buying company GroupM had conducted a study on the three largest digital ad companies. This includes Meta, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which owns Google, and Amazon (NASDAQ:AMZN).
The study found these three tech giants control more than half the global advertising market outside China. This control has actually increased as the pandemic hastened the move to digital advertising and away from traditional ads.
In fact, this year, the digital revenue stream is set to account for almost two-thirds of global ad income. This compares with little more than a quarter in 2014. To put it bluntly, traditional media advertising through newspapers, TV and radio is on the decline as a percent of total ad revenue.
This concentrates the power in the hands of these giant advertisers. It’s also one of the reasons each company posted higher profits this year compared to most industries.
How This Relates to FB Stock
For example, Meta Platforms is forecast by analysts to earn $13.96 in earnings per share (EPS), according to 35 analysts surveyed by Seeking Alpha. That will be 38.35% higher than the $10.09 EPS it made last year.
Moreover, so far this year Facebook has made $29.1 billion in net income on revenue of $84.3 billion. This represents a net income margin of 34.5% for the 9 months ending Sept. 30. Many other industries and companies in the traditional ad business don’t make these kinds of profits.
Moreover, these same analysts — as well as most of Wall Street — still forecast higher profits for 2022. For example, the average revenue forecast is for $140 billion in 2022, up from the $117.65 billion forecasts for 2021. That represents a potential rise of 19% in the company’s revenue for 2022 over 2021.
Therefore, given this rise in forecast revenue, one could also expect that 2022 EPS will rise 19% as well with the same margin. This makes Meta Platforms a highly reliable growth story, despite the company’s huge market value.
Where This Leaves Investors in FB Stock
At $325.45 per share as of Dec. 20, FB stock trades for just 22.5 times forecast EPS of $14.41 per share. This is well below the company’s historical price-to-earnings (P/E) multiple.
For example, Morningstar reports the valuation of FB stock has had an average P/E multiple of 30.8 times over the past five years. In addition, on a forward P/E basis, the average ratio has been 25.14 times.
So, even if FB stock were to rise to that average forward P/E level, the stock would trade at $362.27 per share. That price target represents a potential gain of 11.3% over yesterday’s price.
Remember that is just if the stock rises to its average forward P/E. I suspect it will go much higher than this, as I pointed out in my last article. I had a target price of $515 per share, or 58% over today’s price, based on my previous free cash flow analysis.
The bottom line is this: Facebook’s digital ad revenue will continue to be a robust growth and profit center. At this point, FB stock looks like a good bargain.
On the date of publication, Mark Hake did not hold (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.