Facebook Inc. (NASDAQ:FB) stock has been consolidating for a while. However, don't let the bearish noise lure you into selling FB stock.
Mark Zuckerberg led Facebook, Inc. (NASDAQ:FB) has recently been in the news, though not necessarily for the right reasons. The European Commission, not too happy with the tax evading practices of big technology firms, is keen to tax them on a revenue basis, rather than charge them based on the profits earned. While such a regulation looks more like noise at the moment, it has brought into the FB stock discussions the impact of heftier tax bills. The investigations into the possibility of Russian interference in the last US elections hasn't helped Facebook's cause either. However, while these might bring a break to the FB stock rally, Facebook stock hasn't lost its longer-term charm, which is why we still have it among our top stock picks from the technology sector.
Is FB Stock Ripe For Profit Booking?
Facebook stock has had a strong run this year. The stock is up by 48.7% year-to-date, beating the Nasdaq Composite's (INDEX:COMPX) 19.3% rise in the same timeframe. FB stock has also outperformed the benchmark index over the last one year, by a difference of over 10 percentage points.
The strong rally in the stock price raises one important question: Is it time to take some money off the table and book profits in your Facebook stock investment? Well, not necessarily, and here is why.
Facebook Inc. Stock Rally Is Supported By Strong Growth In Fundamentals
While FB stock has definitely been hot on Wall Street, the rally has been firmly grounded in the strong fundamentals. Facebook fundamentals have outgrown the rally in the stock. To understand this, we can compare the growth in the fundamentals against the rise of Facebook stock price, over the course of the last one year. Facebook's trailing twelve month (TTM) revenue has swelled to $33.17 billion, up nearly 50% over the year-ago print. Turning to the bottom line, Facebook currently has a TTM EPS of $4.62 a share, up from $2.23 in the year-ago quarter. In percentage terms that's a growth of 107%, on a year-over-year basis. And, impressively enough, a lot of this earnings growth is also reflected in the Free Cash flows of the firm, which have grown by nearly 40% over this timeframe. The growth in fundamentals has outpaced the rise in FB stock price, which has advanced by 32.6% in the last 52 weeks. And, where does that put Facebook stock today?
Well, if you believed Facebook stock was an attractive investment a year ago, it is even more attractively priced today. The strong fundamental growth has ensured that Facebook valuations have trended lower, in spite of the strong rally the stock has seen. Facebook currently trades at a price-to-earnings multiple of 38.98x its TTM EPS. While the multiple does come across as expensive, investors should note that Facebook traded at a 60+ earnings multiple only a year ago. If Facebook was an attractive investment back then, its still an attractive investment today, given that the Facebook growth story remains intact even today.
Facebook Is Still Poised For Strong Growth
Facebook is not only the best social media play, the company is also expanding its presence into other areas of online media consumption. In a recent move aimed at strengthening its position in the online video consumption market, Facebook announced a decision to open its purse and splurge money on content creation. Facebook is a near-monopoly in the rapidly growing mobile advertising market, a fact reflected by the steep growth in its fundamentals.
However, if the recent moves are anything to go by, Facebook is not content with this. As we had noted in a recent post, the company has now set its sights on the digital payments market, which in itself could be a huge multi-billion dollar opportunity for Facebook.
The huge growth opportunities ahead of Facebook are also reflected by Wall Street expectations. The current Wall Street consensus expects the firm to grow its top line at an average annual rate of over 35% through the next couple of years. GAAP earnings are expected to grow slightly faster, at a 36% average annual rate through FY 2018. Not surprisingly, Wall Street has a $192 price target for Facebook stock, implying a 13% upside to the last closing price for FB stock.
Facebook stock price seems to have entered a phase of consolidation over the last couple of months. The strong rally leading into the consolidation phase, coupled with the recent range-bound activity, can lure Facebook stock investors into profit booking. However, given the longer-term growth trends in the online advertising industry (mobile advertising in particular) and Facebook's continuous efforts to expand its revenue sources (video ads, payments industry), Facebook stock appears to be poised for a good run over the long term. Hence, Facebook stock remains an attractive long term buy.
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