- Facebook stock is down nearly 10% since it announced its latest set of earnings numbers.
- The Menlo Park based company has also been caught up in allegations of creating 'echo chambers' ahead of the Donald Trump victory.
- Is the recent downtrend part of a bigger decline coming for FB stock, or is it a good opportunity to buy into the stock?
Facebook (NASDAQ:FB) Inc. reported a strong set of Q3 numbers a week ago. However, the Facebook stock price has fallen by nearly 10% in 7 trading sessions following the announcement, as some analysts claimed 'peak Facebook' was now behind us. In an unexpected twist, the victory of Donald Trump in the US presidential elections has become the latest 'thorn in the flesh' for Facebook, as reports are surfacing that Facebook created insulated 'echo chambers' which affect the news FB users see. As a result, various sections of the media have criticized the social networking giant for the way news is disseminated, which could have impacted the US presidential election. (See also: Should Warren Buffett Buy Facebook Inc. Stock?)
Donald Trump: Facebook, Twitter Helped Me Win
The 'idea' of Facebook impacting the election results was accentuated by president-elect Donald Trump's claims that Facebook and Twitter (NYSE:TWTR) helped him win the US presidential election without having to spend as much as the Clinton campaign on other traditional advertisements. On CBS's 60 minutes, in his first extensive post-election interview, Trump said:
The fact that I have such power in terms of numbers with Facebook, Twitter, Instagram, etc, I think it helped me win all of these races where they’re spending much more money than I spent.
Facebook, for the major part, has tried to wash their hands off by making 2 claims. The company has defended itself saying that it isn't a news media company and also claims that news forms a minuscule percentage of the content users access on Facebook. Here's what Zuckerberg, CEO of Facebook, had to say about these rumours, in a recent Facebook post:
Of all the content on Facebook, more than 99% of what people see is authentic. Only a very small amount is fake news and hoaxes. The hoaxes that do exist are not limited to one partisan view, or even to politics. Overall, this makes it extremely unlikely hoaxes changed the outcome of this election in one direction or the other.
Moreover, in the same post, the Facebook founder also stated that the company is continuously working to flag hoaxes and fake news in the system.
That said, we don't want any hoaxes on Facebook. Our goal is to show people the content they will find most meaningful, and people want accurate news. We have already launched work enabling our community to flag hoaxes and fake news, and there is more we can do here. We have made progress, and we will continue to work on this to improve further.
Is Facebook Stock A risky Bet?
Facebook stock started its downtrend after the company announced its latest quarterly numbers last week. The latest rumours of Facebook's 'echo chambers' and Donald Trump's claims that the company helped him win are only short term drivers of sentiment. It has no immediate meaningful impact on Facebook, its stock or investors. Investors need to focus on the underlying fundamentals and look at the fall in Facebook stock price in context of the company's fundamentals. (See also: Will Bullish Sentiment Lift Facebook Inc. Stock?)
In its recent Q3 earnings report, Facebook beat analyst estimates by a big margin, after reporting EPS of $1.09 on revenue of $7.01B. Analysts anticipated 97 cents earnings on revenue of $6.92B. The numbers were good for a 56% YoY topline growth and a 91 % YoY growth in earnings. Moreover, the company reported an acceleration in Monthly Active User (MAU) growth, which came in at 16% YoY. The Daily Active Users (DAU) on the platform rose faster as Facebook saw its DAU/MAU ratio climb to 66% from 65% a year ago. A rising user base along with rising engagement will lead to more revenue generating ad opportunities for Facebook.
The company also had encouraging words to say on the growth in advertisers. A rise in advertisers means a greater competition among advertisers, which should aid the ad prices on the platforms. Quoting Facebook COO Sheryl Sandberg from the Q3 earnings call:
In Q3, we announced that we have over 4 million active advertisers on Facebook and over 500,000 active advertisers on Instagram. The number of advertisers on both platforms continues to grow quickly -- and we're pleased to see more and more of them using the full range of our ad products.
In short, Facebook reported a very healthy quarter. However, investors were spooked by comments from the CFO addressing 'ad load' on the platform. Wehner expects to see ad revenue growth rates come down meaningfully as ad load on the platform approaches maximum levels. In short, Facebook's growth rate could slow. Also, Facebook plans to scale investments in hiring and data centres which could weigh down on profitability next year. The anticipated slowdown in top line growth and the prospects for margin contraction spooked investors, who have been in a hurry to sell the stock. However, is it right to sell the stock now? Or is this the time to buy into FB stock at an attractive valuation?
In short, Facebook reported a very strong quarter irrespective of the way you look at it. With such a strong quarter canvassed onto the recent 10% fall, there was going to be only one destination: more attractive valuation. Facebook stock currently trades at a sub 50 PE ratio of 45.9 (based on Nov 11 closing price), which is the lowest valuation the stock has traded at over the course of its life as a publicly listed company. The company trades at 29X analysts FY2016 estimates, and these are extremely attractive levels for a company expected to grow its earnings at an annual average growth of 35% over the next 5 years.
Facebook has been at the center of controversy over the last few days following the election results. However, the election centred discussions/rumours will not have any meaningful long-term impact on the company. While investors have punished Facebook stock on fears of a slowdown in top line growth and profit margin contraction, the current valuations make Facebook an opportunity hard to ignore. The FB stock currently trades at the lowest valuation levels since its IPO, and it makes for an attractive long term buy, given the rate at which Wall Street expects the company to grow.
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