Facebook Is Now the Market’s Most Undervalued Growth Stock — And It’s Going to $400

Shares of Facebook (NASDAQ:FB) rose slightly after the social media giant reported blockbuster fourth-quarter earnings, and quite frankly, I’m surprised FB stock isn’t soaring right now.

Facebook Stock Looks Bulletproof Ahead of Upcoming Earnings

Source: justplay1412 / Shutterstock.com

Facebook absolutely crushed revenue and earnings estimates. Usage numbers also easily cleared expectations. Revenues rose by their fastest rate since the second quarter of 2018. Operating margins expanded for the first time since the first quarter of 2018, before the Cambridge Analytica scandal forced Facebook to significantly up data security spend.

Yes, the guide was weak. But management is under-promising, over-delivering. Facebook is actually positioned to have a great 2021.

And, perhaps above all else, Facebook stock is dirt cheap relative to the company’s long-term earnings growth potential.

The investment implication?

While the market is hyper-focused on Reddit trading, the GameStop (NYSE:GME) squeeze, and all that noise, the smart thing to do here is to ignore all of that, buy FB stock, and position yourself for a big 2021.

Here’s a deeper look.

FB Stock: Strong Q4 Earnings

Facebook’s fourth-quarter earnings were absolutely fantastic.

Usage numbers were solid. They came in above expectations, and both daily and monthly active user counts sustained double-digit year-over-year growth, which is impressive considering both numbers are in the billions.

Average revenue per user ticked up by 19%, powering 33% revenue growth — which is the biggest revenue growth rate the company has reported since the second quarter of 2018. All of this broadly underscores that ad dollars continue to shift into the digital channel, and that Facebook’s targeted ad capabilities remain unprecedented.

More importantly, Facebook’s operating margins expanded about 400 basis points year-over-year to 46%. This marks the first time that operating margins have expanded year-over-year since the first quarter of 2018, which is before the Cambridge Analytica scandal forced Facebook to up data security spend. Thus, the Cambridge Analytica headwind on margins appears to be in the rearview mirror, and Facebook looks ready to get back to a steady cadence of healthy margin expansion.

From head to toe, Facebook’s fourth-quarter earnings report was stellar. Yet, FB stock barely budged in response… mostly because the guide didn’t quite live up to expectations.

2021 Headwinds are Overstated

Facebook management spooked investors where they said that the company’s 2021 growth rates could be adversely impacted by a shift away from digital products and services as Covid-19 vaccines get distributed, and as Apple (NASDAQ:AAPL) rolls out a new iOS that limits the advertiser’s ability to use data.

Both of these headwinds are overstated.

Yes, the economy will reopen in 2021/22. Yes, consumers are going to go back outside. But guess what? They are still going to spend a lot of time on Facebook, Instagram, Messenger, and WhatsApp, too. Why? Because those are inherently “share what you’re doing” apps. The more consumers go outside and do things again, the more they will share pictures of those things on Instagram and the more they will use Messenger and WhatsApp to plan things with friends.

It’s that simple.

At the same time, ad spending is going to rebound in 2021, and a lot of those ad dollars will continue to migrate into the digital channel because consumption will remain heavily engrossed in the digital channel. Sure, Apple iOS changes will hamper some Facebook ad capabilities. But only marginally, and it will impact the whole industry equally, meaning Facebook will remain the best game in town.

Net net, the 2021 headwinds that are spooking investors, are also overstated — meaning the relatively small move in FB stock following a strong earnings report is actually a great buying opportunity.

Facebook Stock Is Undervalued

Consensus 2021 earnings estimates for Facebook sit at $11.40 per share. The FB stock price today hovers around $270. That means FB stock is trading at less than 24X forward earnings.

That’s a pretty low multiple for a tech giant growing revenues and earnings at a 20%-plus pace, especially in this market.

To that extent, I think FB stock is one of the few undervalued, high-quality growth stocks in the market today.

Indeed, I continue to believe that Facebook is on track to report $20 in EPS by 2025. Based on a simple 20X forward multiple, that implies a 2024 price target for FB stock of $400 — roughly 50% higher than the current FB stock price.

Bottom Line on FB Stock

Facebook stock gets a lot of hate in the market these days.

I get it.

But, the reality is, we are all addicted to Facebook’s suite of digital properties, the company has the best digital ad business in the industry, and FB stock is woefully undervalued due to near-term optical issues that will pass.

That’s why I think now is the time to buy FB stock. Long term, this stock is going way higher.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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