"Interestingly, Facebook is now the second cheapest stock in our large cap coverage (eBay is cheapest) and trades at a 30% discount to the Nasdaq (vs. two-year average 18% discount). In our view, Facebook's valuation is among the most attractive in Internet, particularly on a growth adjusted basis," Thill said in a new research note Wednesday.
Thill's math has Facebook's stock being at least 20% undervalued at current price levels.
"Our scenario analysis indicates that our base case $18.25 EPS est for FY23 at a low 20x P/E multiple is enough for 20%+ stock upside. We note that our current estimates do not embed any upside from Reels or Shops ads," explained Thill.
Shares of Facebook rose slightly in Wednesday's session to $340.58. But, the stock has tanked 6.6% in the last month — lagging the Nasdaq's 1% gain. It's also the worst-performing member of the FAANG [Facebook, Amazon, Apple, Netflix, Google) cohort, trailing the 1.5% drop in Amazon for this not sought after honor.
The pressure on the stock reflects several factors.
Facebook whistleblower Frances Haugen appeared before a Senate panel recently to discuss the internal documents she compiled on the side effects of the tech giant's products. Lawmakers are expected to use Haugen's findings to reignite the debate over whether Big Tech should face tougher regulations or perhaps, be broken up.
Investor sentiment on Facebook is still recovering from outages on services WhatsApp, Instagram and Facebook last month.
And lastly, the WSJ's ongoing investigative reporting on Facebook continues to call into question whether the company could maintain its historically pace of growth amid greater public scrutiny of its business practices.
Thill believes the fundamental story of Facebook is still intact.
"Notably, our checks still point to robust Q3 ad spending with some advertisers reporting their Facebook spend coming in ahead of plan. We also highlight that Instagram Reels Ads are now live and are already driving incremental engagement and ad dollars to the platform. The launch of Reels Ads reminds us a lot of Stories Ads, which became Facebook's largest impression driver within 18 months of launch. In our view, Reels and Shops could potentially be multi-billion ad businesses in '22 and drive upside to the Street's conservative 20% revenue growth estimate. Historically, Facebook has never grown revenue below 20% annually with the company even managing 22% growth in FY20 during COVID-19," Thill says.