Facebook Inc (NASDAQ:FB) stock is no longer the preferred choice among smart-money hedge funds, with Alphabet Inc (NASDAQ:GOOGL) recently supplanting it. But that doesn’t mean FB stock is no longer dearly beloved by Wall Street.
Facebook is perched near $170 per share, and is just a couple percentage points away from its all-time high of $175.49. Shares are up more than 45% year-to-date, easily besting the 8% rise in the S&P 500.
Is Facebook’s Growth Over?
But the bears, who have called for “Peak Facebook,” have raised valuation concerns.
And fears about slowing growth are said to have put a near-term ceiling on shares.
Indeed, FB stock is no bargain, trading at 26 times fiscal 2018 estimates of $6.48 per share, compared to a forward P/E of 19 for the S&P 500 index. But those estimates also assume year-over-year earnings growth of more than 21%, which is more than five times the S&P 500’s projected growth rate.
Good luck finding another large-cap stock that is growing profits at that rate and growing the top line at more than 40%.
Obviously, Facebook’s own commentary about its slowing growth rate, particularly in terms of relying on higher news feed ad load, has given investors some pause. The company is also seeing a decline in average pricing. However, much of that decline is due to the fact that newer advertising formats such as video is now accounting for a larger chunk of the business.
To be sure, management’s warning is a way to alter investors’ perception on how the company’s growth is measured.
More Than Just an Ad Load Story
Facebook no longer wants to be viewed solely on its ability to inject ads into its News Feed — a practice that can degrade the user experience. Instead, FB is focusing on ways to drive higher engagements via new strategies such as videos, which in turn, can generate higher subscriber growth.
During that shift, however, the current rate of revenue growth will slow. It already has begun to show.
In the second quarter, while Facebook’s total revenue grew 45% YOY, topping Street estimates, it was down from 49% expansion in the first quarter, while down from 51% and 56% in the respective fourth and third quarters of 2016. When compared to the first quarter of 2016, that marks a growth deceleration of almost 15 percentage points.
But that in and of itself doesn’t mean Facebook is out of juice.
Money Still Talks
Although revenue growth is slowing, Facebook’s profits continue to accelerate because it is more strategic in how it targets ads, which it’s increasingly doing through video. And with the digital ad market poised from exponential growth — spending on digital advertising is projected to rise 18% in 2017 to $229.25 billion, up from $194.6 billion in 2016 — that bodes well for FB.
That increased ad spending affirms the extent to which advertisers continue to value digital and mobile when it comes to connecting with potential customers.
This bodes well for Facebook’s dominating mobile capabilities, which gives it an advantage not only over Alphabet Inc (NASDAQ:GOOGL), but also social rivals Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP). That’s because aside from Facebook’s core platform, the company also has WhatsApp, Messenger and Instagram to sustain its long-term growth rate. Among these assets, only Instagram — 700 million monthly active users, up from 600 million in the previous quarter — has fewer than 1 billion monthly active users.
In short, don’t focus solely on the rate of overall revenue growth. The fact the digital ad pie is expanding will allow FB to draw enough revenues from that pie, allowing it to boost the bottom line. In terms of profits, Facebook’s second-quarter number of $3.9 billion marked a 71% year-over-year surge.
Bottom Line for FB Stock
With 2 billion active users on the platform, Facebook’s massive advertising network will remain a force to be reckoned with for many years to come. And the fact that half of the company’s revenue currently comes from North America suggests there’s still an underserved addressable market overseas that Facebook can tap into.
As such, while FB stock is not the bargain it was back in January when it traded under $120, the long-term thesis is still in play. And from my vantage point, the so-called “peak Facebook” is a myth. I expect shares to rise to $200 in the next 12 to 18 months.
If anything changes until then, I’ll re-evaluate.
— Richard Saintvilus
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Source: Investor Place