Facebook Inc. stock has gained over 20% in the year-to-date. Is FB stock still a good buy at the seemingly expensive valuations it trades at?
Facebook stock hits fresh all-time high! Well, that's a phrase investors have been repeatedly hearing in recent times. Shares of the Menlo Park, California-based social networking giant, Facebook (NASDAQ:FB), have gained over 21% in the year to date. And, the bullish run is far from over. Apart from the rapidly growing Instagram and strong mobile ad revenue growth, which will help sustain Facebook's near-term growth, the social networking giant has many more growth drivers waiting under its wings. If you thought the rally in FB stock was over, think again. Here are 3 reasons why Facebook stock will continue to move higher.
Facebook's Ad Revenue Business Will Continue To Power Ahead
First and foremost, Facebook's ad revenue growth isn't going to slow down anytime soon. Yes, while there have been many concerns given the ad load saturation, Facebook should see its ad revenues swell as advertisers increase their ad budgets. As per eMarketer, digital ad spending is expected to climb from $194.6B in 2016 to $335B in 2020, growing at a CAGR of 14.5%. However, mobile ad spending, which made up 20% of overall ad spending in 2016, is expected to grow at a much more impressive 31% CAGR, to make up 34.2% of overall ad spending in 2021. And, considering the fact that Facebook is the most dominant player in the mobile ads space, this will act as a secular growth driver for the company, and by extension, for Facebook stock.
The strong momentum enjoyed by Facebook's advertising revenues was also highlighted in a recent UBS report. UBS analyst Eric Sheridan, while reiterating a buy rating, raised his FB stock price target from $155 to $165. The analyst considers Facebook "a core, large-cap internet holding for strong revenue growth at reasonable valuation multiples." Addressing the rising concerns around the growth of Facebook's ad revenues, the UBS analyst wrote, "Can Facebook grow its advertising business at a 25%+ CAGR for '16-'19? - Yes, based on our Evidence Lab work & channel checks, we see the key drivers being video, eCommerce, & Instagram." In short, the growth in Facebook's ad revenues is a multi-year growth story.
Facebook has Multiple Growth Drivers
Apart from the multi-year growth potential of its advertising revenues, Facebook also has many other growth drivers, which should drive longer-term growth for Facebook. While Instagram and Mobile ad revenues will drive Facebook's growth over the foreseeable future, other assets/properties like Messenger, Whatsapp, Oculus help extend the current momentum over a longer time frame. In the research report referenced above, Eric Sheridan wrote that these platforms will shift focus from "user growth & ecosystem investments to monetization engines" over the next 2-5 years. In other words, these platforms will start to have a meaningful impact on Facebook revenues/profits over the given timeframe.
In addition to Oculus, Facebook might also have other hardware ambitions. As reported by BusinessInsider, a hardware group within Facebook, called the building 8, is working on everything from AR to mind reading. Quoting from the source: "A top secret division within Facebook called Building 8 is working on at least four consumer hardware products, spanning everything from cameras and augmented reality to science fiction-like brain scanning technology." The post goes on to state that the company could launch the first of their hardware products at the upcoming F8 conference, where Facebook CEO Mark Zuckerberg, last year, unveiled the company's 10-year vision.While Facebook is taking on deep-pocketed competitors like Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOGL), the company isn't treating 'Building 8' like a hobby. In fact, the company is taking steps to sell units by the millions. As per BusinessInsider, "An analysis of Building 8's recent hires and job listings by Business Insider, as well as conversations with people close to the company, shows an ambitious effort to create and sell millions of consumer hardware units, from a supply chain outpost in Hong Kong to a planned retail push and customer call center operation." While there is no official confirmation on this yet, given the huge competition to build ecosystems around hardware products, this surely should get FB stock investors excited.
Facebook stock is a solid buy.
All in all, Facebook is a solid growth opportunity. And, if you thought that it would cost a lot to buy into a growth story like Facebook's, think again. FB stock currently trades at a Forward PE multiple of under 21. That, for a company which is expected to grow earnings at an average rate of 23.5% over the next 5 years. Well, if that's not cheap, we don't know what is. Another way to look at Facebook stock is to evaluate the stock using the 'margin of safety' approach. As highlighted in our recent report, Facebook stock offers a significant margin of safety. As per our DCF model, based on current growth estimates, the Intrinsic value of Facebook came in at $190 per share. With FB stock currently trading at just under $140 per share, the stock offers a 25%+ margin of safety. The strong multi-year growth story, attractive forward valuations and a significant margin of safety make Facebook stock an attractive long term buy.
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