5 Reasons I Bought Facebook Stock (Again)
I once owned IPO shares of Facebook (NASDAQ: FB), but I sold my entire position in late 2014. That turned out to be a huge mistake: The stock subsequently surged into triple-digit territory.
I've been hesitant to get back into Facebook, but I finally pulled the trigger after its post-earnings plunge in late July. Here are my top five reasons for buying the stock again.
Image source: Getty Images.
1. It's still posting impressive growth
Facebook's revenue rose 42% annually to $13.2 billion last quarter, but missed estimates by $120 million and represented the company's slowest growth in nearly three years. It expects that growth rate to further decelerate by high single digits over the next few quarters.
That slowdown sounds alarming, but a 20%-30% growth rate would still be impressive. It also indicates that Facebook plans to monetize its users more carefully in the wake of the Cambridge Analytica scandal. Wall Street still expects Facebook's revenue to rise 37% this year and 25% next year, so its high-growth days certainly aren't over.
Facebook is also still incredibly profitable. Its operating margin slipped three percentage points to 44% last quarter, but its net income rose 31% to $5.1 billion as its EPS rose 32% to $1.74, topping expectations by three cents. Analysts expect Facebook's earnings to grow 33% this year and 16% next year.
2. It trades at historically low valuations
At $175, Facebook trades at nine times next year's sales and 21 times next year's earnings. Those are both historically low valuations for the company, and they're easily justified by its forward growth rates.
FB PS Ratio (TTM) data by YCharts
For comparison, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) trades at about 26 times forward earnings, compared to analyst projections of 23% growth this year and 21% growth next year.
3. It's still gaining new active users and monetizing them
Facebook is still the largest social network in the world by a wide margin. Last quarter its monthly active users (MAUs) rose 11% annually to 2.23 billion, as its daily active users (DAUs) grew 11% to 1.47 billion.
The fact that Facebook's revenue growth continues to outpace its active user growth indicates that its average revenue per user is still rising. This isn't surprising, since Facebook and Alphabet's Google hold a near-duopoly on internet ads across many markets (including the United States).
Moreover, Facebook's business model, based on crafting targeted ads based on users' social profiles and connections, is arguably superior to Google's less-personalized model of using search, browsing, and location queries.
4. It still has plenty of new revenue streams
Many investors often forget that Facebook also owns Instagram, which has over a billion MAUs, and WhatsApp, which has over 1.5 billion MAUs. Facebook's own Messenger app, which it's expanded as a stand-alone platform for mini-apps, reaches over 1.3 billion MAUs.
Facebook only recently started monetizing these platforms, with more ads in Instagram, business-oriented features in WhatsApp, and the introduction of new services like mobile payments and games in Messenger.
Image source: Getty Images.
Last quarter Facebook stated that 400 million people were already sharing Instagram Stories, the new feature which it launched to counter Snap's (NYSE: SNAP) Snapchat Stories, and that 450 million people were using WhatsApp Status, which lets user send ephemeral texts, photos, videos, and GIFs like Snapchat.
Earlier this year KeyBanc analyst Andy Hargreaves estimated that Instagram could generate nearly $9 billion in annual revenues this year (equivalent to 16% of its estimated sales), and eventually $22 billion in sales by 2022. Therefore, Instagram, WhatsApp, Messenger -- and possibly even Oculus VR -- will give Facebook plenty of ways to monetize users beyond its core social network.
5. Its growing pains should be temporary
Many American investors seemed to lose faith in Facebook after the Cambridge Analytica scandal. Yet the company continued to grow its user base, and the data breach and controversy over Facebook's role in the 2016 election aren't major news stories in overseas markets.
Facebook has already introduced new measures to tighten its privacy settings and combat fake news and propaganda accounts. If Facebook gets past these growing pains, it could emerge as a stronger and more mature tech company.
Should you buy Facebook too?
Facebook isn't a stock for everyone. Some investors may have ethical objections with its business model, or consider the stock too volatile. However, I think investors who buy Facebook on this prolonged dip should be well-rewarded in the future as the social media company evolves.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.
