Why Facebook Reaction Was Overdone
If you were one of those rushing to sell Facebook Inc (NASDAQ:FB) on Thursday on concerns that the company’s ad revenue was slowing, you should stop right there.
I covered FB stock about a week ago, citing my bullish case for the best social media company in the world. The price of Facebook stock fell about 5.6%, or $7.00 per share, on the concerns, but I would not be running away from FB stock. I consider it an opportunity, at the current price of $120.00 or lower.
The previous time that FB stock retrenched over six percent—in February—was subsequently followed by a rally. I’m not saying that situation will materialize this time, but opportunities to add on weakness are seldom available for companies as solid as Facebook.
The below FB stock chart shows the prior declines and subsequent bounce. Facebook stock is holding up in an upward trend line, at above the 50-day moving average (MA). As long as Facebook stock can hold the 50-day MA at around $115.00, it should be fine. A break below would be bearish.
Chart courtesy of StockCharts.com
Facebook warned investors that they should expect lower ad revenue growth rates beginning sometime in mid-2017. Since ad revenue accounts for about 97.1% of the company’s total revenue, investors’ response to the announcement was not a surprise, but I’m not throwing in the towel.
The reality is that Facebook’s growth rates in revenue and earnings continue to be staggering.
In its third quarter, revenue growth was 56% year-over-year to $7.01 billion, while earnings surged 165% to $0.82 per diluted share. Facebook reported a 16% increase in its monthly active users (MAUs), to a whopping 1.79 billion in September.
Those signing onto Facebook via mobile devices were 1.09 billion, up 22% year-over-year. Ad revenues from mobile surged to 84% of total advertising revenues in the third quarter, up from 78% in the year-ago third quarter.
These are impressive figures.
What Facebook May Need to Do
While I understand there are concerns about the ability of Facebook to maintain its stellar growth rates, unless it can expand deeper into India and somehow get into China, my thinking is that the company will work on expanding other revenue streams to help reduce its dependence on ad revenues.
The fact that the company has access to so many users means there are cross-selling opportunities.
Armed with a clean balance sheet and about $26.14 billion in free cash, Facebook could venture into businesses where it can sell to its user base. I think this may be on the horizon, as FB evolves as a company, such as what Amazon.com, Inc (NASDAQ:AMZN) has been doing.
FB stock is still reasonably priced at 23.75 times its 2017 earnings per share (EPS), and it has a cheap price/earnings growth (PEG) ratio of 0.95.
At the end of the day, Facebook may be set for its next leg of development as the world’s biggest social media company. With a user base that will likely surpass 2.0 billion sometime in 2017, I wouldn’t be betting against Facebook stock. Instead, I would look at the current weakness in FB stock as an opportunity.
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