Here’s Why I’m Still Bullish on FB Stock
Shares of Facebook, Inc. (NASDAQ:FB) have delivered massive gains for investors since the company’s initial public offering (IPO). Since 2004, FB stock is up nearly 176%, comfortably beating the NASDAQ index and its 74% gain over the same period. Following such a rally, it’s only natural to think the company’s best days are behind it.
Yet despite the big run, FB stock still offers the potential to deliver outsized profits for shareholders. Let me show you three things that Mr. Market seems to have forgotten when it comes to Facebook’s stock value:
Mr. Market Forgot About Growth
Google is still the gold standard of Internet advertising, but ask any marketing manager about Facebook, and you’ll hear how the social media platform is starting to nip at Alphabet Inc.’s marketing heels. By allowing for the greater niche targeting of users the launch of Facebook Atlas in 2014 has greatly improved ad performance. In fact, Facebook now earns more than Google in display ad revenue, according to data from eMarketer. (Source: “Can Facebook Outsearch Google?” Bloomberg, November 16, 2015.)
Those efforts are showing up in the company’s financial results. Last quarter, Facebook’s quarterly revenue and free cash flow jumped 41% and 84% year-over-year, respectively. Not too shabby for a mature technology company.
Mr. Market Forgot About Value
Given that FB stock trades at more than 100 times trailing earnings, it’s only natural to think shares have gotten a little ahead of themselves. But that sort of simple number crunching would be a mistake. Sure, Facebook stock looks rich today, but it’s relatively inexpensive compared to the company’s profits in the years ahead.
Today, FB stock trades at a little over 35 times its forward earnings. According to analyst estimates, the company is expected to grow earnings per share by 33% annually over the next five years. Analysts generally consider a stock cheap when its price-to-earnings multiple is less than twice its growth rate.
In the case of FB stock, investors are getting an outright bargain.
Mr. Market Forgot About the Smart Money
Some of the world’s brightest investors are backing Facebook. Over the past few quarters, a number of respected hedge fund investors, including Ken Griffin, Philippe Laffont, and Paul Tudor Jones, increased the size of their positions in FB stock. Billionaire value investor George Soros has also accumulated a 1.806-million-share stake in FB stock, valued at $190 million.
What has all of these financial titans so excited? I’d say their interest in the social media giant could only mean one thing: they see an epic rally coming for Facebook stock.