Facebook Inc. (NASDAQ:FB) stock was sent crashing in the last trading session. Has the macro-driven sell-off created a buying opportunity in FB stock?
Shares of Facebook Inc. (NASDAQ:FB), the Mark Zuckerberg led social networking giant, fell through the floor in yesterday's market rout. On a day when US-North Korean tensions occupied the headlines, investors ignored the fact that Facebook-owned Instagram hit the 800M user milestone. FB stock closed the last trading session at $162.87 a share, down 4.5% on the day. In comparison, the Nasdaq Composite (INDEX:COMPX) was down by nearly 0.9% while the S&P 500 (INDEX:SPAL) fell by 0.2%, reflecting the decline in the broader markets, which was led by the technology sector. The fall in Facebook stock brings to the front an important question; Should investors buy this dip in FB stock, given the promising advances the Menlo Park, California based tech giant is making? A combination of attractive valuations and a strong growth story make Facebook stock an interesting buy.
Facebook Stock Valuation Near All-Time Lows
As most Facebook investors will note, the company has reported a string of strong quarterly earnings reports. Apart from the stellar topline growth, Facebook has also seen a steady expansion in profit margins, which has led to a more than proportionate growth in earnings.
As is clear from the above charts, Facebook has clocked earnings growth of over 100% YoY, for a major part of the last two years. The strong bottom line growth has outpaced the Facebook stock returns, which has led to a staggering drop in the valuations of the stock. Facebook stock currently trades at a trailing twelve months (TTM) price-to-earnings ratio of 37.1x (based on the Sep 25th closing price), which is down from a 100x multiple only two years ago. In essence, the earnings multiple of Facebook has more than halved over a time period which has seen the stock return over 75%, for an average annual return of over 32%.
Over the last 5 years, the earnings multiple of Facebook stock has ranged from a high of 1448x to a low of 36.6x, which puts the current valuation levels right at the lower end of that range. The big question here; Has the latest drop in FB stock price made it an attractive buy, from a valuation perspective?
The Facebook Inc. Growth Story Is Still Intact
It's not hard to understand that the macro news which drove down the broader markets in yesterday's trade has little direct impact on Facebook's business, at least not in the near term. Hence, we believe that the broader market sell-off could have created a buying opportunity n FB stock. As we have noted on multiple occasions in the past, Facebook is the best social media play, also leveraging the rapid growth of mobile advertising. And well, Facebook isn't one to rest on its laurels. Of late, Facebook has turned its attention to the digital payments and the video advertising markets, each of which could be multi-billion dollar markets by themselves.
To cut the long story short, Facebook's growth story, based on a foundation of rapidly growing (and highly profitable) mobile advertising revenues and helped by the strength of platforms like Instagram, is still intact. In what was yet another reminder of its rapid growth, Instagram announced that the platform now has over 800M monthly active users, a 100M improvement over April's 700M print. The platform also has over 500M daily active users, which compares against 173M DAUs reported by rival platform Snapchat. While growth investors will still flock to FB stock, are the current valuations attractive enough for value investors to get in on the trade as well?
Playing Facebook Stock from Here
As we have mentioned earlier in the post, Facebook stock is trading closer to the lower end of its historical valuation range. And, that's in spite of the fact that Facebook's growth story is more than intact. Investors looking for more proof of Facebook's stellar growth should look no further than the rising Wall Street estimates (Source: Yahoo Finance).
The Wall Street consensus has steadily crept up over the last few quarters, with the FY 2017 and FY 2018 EPS estimates rising by over 9% and 8%, respectively over the last 90 days. To put it another way, Wall Street is increasingly bullish on Facebook's future prospects, as more and more new information is factored into the financial models of different analysts. Not surprisingly, Wall Street has a consensus price target of $192.6 a share, implying an upside of 18.3% from the last closing price. However, the current consensus price targets do come across as conservative. Here is why.
The consensus target price values Facebook at 29.7x the FY 2018 EPS estimate. Factoring growth into the equation, the FY 2018 EPS estimate of $6.49 implies a 2-year CAGR of over 36.4% (EPS of $3.49 in FY 2016). In other words, Wall Street is currently valuing Facebook stock at a 2 year forward PEG of 0.82x, which is lower than the threshold of 1 used to identify undervalued securities. This analysis ignores the fact that Facebook has consistently outperformed the high end of Wall Street estimates, and has never traded at a sub-30 earnings multiple over its life as a public company. Hence, the current Wall Street estimates do come across as conservative.
To sum up, the recent drop in Facebook stock price could have opened up a buying opportunity in Facebook stock. Hence, long-term investors should consider buying this dip in Facebook stock price. FB stock is one of our top stock picks from the technology sector, which have outperformed the NASDAQ by over 141%.
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