Is Facebook Still a Buy?

Facebook put the old adage that “all publicity is good publicity” to the test recently. The company has been under fire for spreading fake news since the 2016 Presidential election. Recent revelations related to the election have compounded that problem.

News stories have detailed that political data company, Cambridge Analytica, had access to unsanctioned Facebook user data during the election. According to initial reports, of Facebook’s 2.14 billion users, only 2.33% (50 million) had their personal data shared with Cambridge Analytica.

However, that number was recently revised up to 87 million, and could still go higher. That’s led to calls for an investigation and possible industry regulations.

Facebook CEO Mark Zuckerberg was called to testify on Capitol Hill and the story seemed to fade from the headlines. It hasn’t completely disappeared but the stock has formed a short term bottom.

FB daily chart

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The question is whether or not the stock offers value at its current price.

Facebook Leads Its Sector

Facebook offers a social media platform although critics argue that it should be considered a publisher or that it’s algorithms in fact determine what users see. While regulation could change the company’s status, for now it remains a social media company.

The stock’s performance confirms that it is a leader in that space.

 

social media stock performance

Source: FactSet

Operational metrics confirm that Facebook is a leader in that space. This chart shows the number of average users for Snapchat (at the top), Twitter (in the middle) and Facebook (at the bottom of the chart). Analyst projections are also included.

daily & monthly users

Source: FactSet

Analysts surveyed by FactSet after news about Cambridge was released are still projecting double-digit year over year growth for Facebook’s user base in four of the next five years. Facebook is still projected to outperform its competitors in the social media space.

Facebook’s growth is not restricted to a single application. The company has a total of almost 5.6 billion active users. Facebook pages account for about 2.1 million users. Its Messenger app adds 1.3 billion, about the same number using WhatsApp for messaging and Instagram adds 800 million to the total.

But, Users Are Just One Part of Social Media

Users, and user growth, are important to a social media platform only because they are the target of advertisers. FactSet also surveyed analysts to determine their views on how well the leading social media platforms will monetize their user base. The results are shown in the next chart.

social media platforms

Source: FactSet

These estimates were prepared after Facebook suffered some immediate problems when news of the data breach was revealed. Some companies, including Mozilla, Wi-Fi connected speaker producer Sonos, and auto-parts store Pep Boys announced that they will no longer use Facebook to advertise.

If advertisers flee, the estimates will not be reached, and the stock price of Facebook will suffer. But, so far, few defections of advertisers have been confirmed.

In addition to this threat to revenue, Facebook also recently announced a change to its news feed that the company says are intended to increase meaningful interactions between friends and decrease publisher content.

This change had already resulted in a decline in page traffic to advertisers who were concerned. But, the alternatives also have drawbacks.

Twitter offers a relatively small audience of just 330 million active users and questions about how many of those accounts are real and how many are bots. Snap recently updated its app, Snapchat, but users are not embracing the changes.

Bloomberg noted that one celebrity questioning Snap’s changes resulted in a sell off that reduced the company’s value by $1.3 billion.

social media

Source: Bloomberg

With limited competition, and with its competitors facing problems of their own, Facebook may not suffer for its missteps.

Fundamentals and Other Factors in Pricing

Facebook’s large user base means the company generated more than $40.6 billion in revenue in the past twelve months. Net income amounted to 39.2% of revenue. Net income has been at least 18.9% of revenue since 2013, the year the company first reported a significant profit.

Analysts expect the company to report earnings per share (EPS) of $7.24 this year. That’s expected to grow to $8.77 in 2019 and $10.78 in 2020. EPS are expected to grow at an average rate of 26.1% a year.

With this information, we can develop a price target for the stock. The PEG ratio compares a stock’s price to earnings (P/E) ratio to the growth rate of EPS. A PEG ratio of 1 is considered to be fair value. This formula recognizes that rapid growth in EPS should be rewarded with higher P/E ratios.

For Facebook, based on expected EPS for this year, the stock’s fair value, according to the PEG ratio is $188.96. This is well above the stock’s current price and Facebook could be considered a buy based on this technique.

The market price discounts the future, meaning that traders look ahead and value the company, in theory, based on future earnings. Using 2020 expected earnings, we could develop a price target for Facebook.

With EPS of $10.78 and a P/E ratio of 26.1, the stock could be worth more than $280 a share. This is more than 60% above the stock’s recent price. Few stocks, especially in the large cap sectors, offer such large gains.

However, there could be some other factors investors want to consider.

Another view of Facebook’s stock performance is shown below. This chart includes Facebook and the S&P 500 Index.

FB Chart

This chart shows the two have been moving in the same general trend for most of the past four years. However, Facebook moves more than the index. This means that the stock delivers larger gains than the index in up trends and delivers larger losses in down trends.

This could simplify the investment decision for some investors. Investors with a bullish outlook should consider Facebook because it is likely to beat the market. Investors who believe stocks are likely to fall should most likely avoid Facebook since the stock could fall more than the index.