Buy the Earnings Dip in Facebook Stock?
InvestorPlace - Stock Market News, Stock Advice & Trading Tips Facebook actually presents good value down here, but there are reasons to be concerned about FB stock after the company's...
That fear mostly stems from the report they received last week on Snap (NYSE:SNAP), which plunged on the results. The social media space as a whole moved lower, as Snap’s disappointment was mostly tied to Apple’s (NASDAQ:AAPL) new privacy rules.
For Facebook, the results were a bit more mixed. With the stock’s 4% dip, bulls have to decide if this is a pullback worth buying or one to avoid.
Mixed Reaction to a Mixed Result
Earnings of $3.22 a share beat estimates by 4 cents. However, revenue of $29.01 billion missed expectations by ~$513 million despite growing more than 35% year over year.
So good and bad.
Daily active users (DAUs) climbed 6% to 1.93 billion and eked past estimates of 1.94 billion. However, monthly active users (MAUs) of 2.91 billion missed estimates of 2.92 billion despite also growing 6%.
In other words, more good and bad.
For the full year, management guided for revenue of $31.98 billion to $34 billion, easily short of the $34.8 billion consensus. On the flip side, Facebook added another $50 billion to its share repurchase plan. Management also talked about notable investments in its future growth levers. While this presents opportunity, it also presents risk and increased spending.
While it doesn’t seem necessary to say, there is more good and bad in this observation as well. Although I’d say more bad, because that guide isn’t all the great. That said, Facebook could come in above these estimates and put to rest any concern for its growth story.
Higher spending, potentially lower profitability and lower-than-expected revenue is the takeaway in my view. User growth was decent, while the slight beat in DAUs is effectively a wash with the slight miss in MAUs. The same could be said for the slight beat on earnings washing out the slight miss on revenue.
Breaking Down Facebook
This all comes down to the future and what Facebook can deliver. When COO Sheryl Sandberg speaks cautiously on Facebook’s business, it is a bit of a concern. Quoting from another article, Apple’s recent changes not only hurt Facebook, other social media companies and small businesses, but it strengthens Apple’s own advertising agenda. Hence, why it went into effect. Sandberg said:
“The changes have presented dual challenges; the accuracy of ad targeting decreased, and then measuring the outcomes of ad campaigns has become more difficult.”
The bright future for social media is dimming a bit and perhaps that will accelerate advertising on other mediums — like connected TVs. That said, social media is still a very efficient advertising medium and a very profitable one at that.
Admittedly, these estimates are likely heading lower in the future. However, at the moment, consensus estimates for Facebook expect about 37% revenue growth this year (a Covid-19 rebound year), then 19% growth in 2022 and 18% growth in 2023.
As for earnings, expectations call for about 14% growth this year and 15% growth in 2022.
Of the two metrics — earnings and sales — revenue is more at risk than earnings. The most recent report and follow-up guidance suggests as much as well..
As it stands though, Facebook trades at just 22 times this year’s earnings and 20 times next year’s expectations. That’s actually pretty darn cheap for a stock like this.
Facebook commands gross margin and profit margin of roughly 81% and 36%, respectively. The next closest FAANG component is Alphabet, coming in at 57.6% and 29.5%, respectively.
When it comes to the social media space, Pinterest (NYSE:PINS) is close on gross margins (81% vs. 79.2%) but nowhere near it on profit margin (7.2% vs. 37%).
Bottom Line on FB Stock
Whether we’re talking about FAANG or industry peers, Facebook is dominant and 22 times this year’s earnings isn’t bad when we’re talking about solid top- and bottom-line growth. If that valuation is too rich, consider that Facebook now trades with a lower forward P/E ratio than the S&P 500.
Or consider that Procter & Gamble (NYSE:PG) trades at 24 times this year’s expected earnings. With that 2.5% dividend yield, investors will get single-digital revenue and earnings growth this year and next year.
Or how about Clorox (NYSE:CLX), another blue-chip holding. For 29 times this year’s earnings estimates, investors can also bask in single-digit earnings and revenue growth, along with a 2.9% dividend yield.
One might argue that these are tried-and-true businesses with robust financials. But they can’t stand up to Facebook’s fortress balance sheet.
Granted, the social media giant is far from perfect. Ethically speaking, there are issues with the role the company plays within our society. Further, a slew of whistleblower documents raises a red flag or two.
But if we’re just talking about the nitty gritty of the business, you can make a case for buying FB stock.
As for the charts, let’s see if we get a dip down to the $300 area. Near this area, FB stock should find some decent support, as it’s a prior breakout zone.
From here, I’d love to see it hold the 50-week moving average and power higher. Otherwise, a bit more selling pressure may come into play.
In either scenario, FB stock needs to reclaim the 200-day moving average. That’s followed by the $330 level, the gap-fill mark at ~$338, then the 50-day moving average.
On the date of publication, Bret Kenwell held a long position in SNAP and PINS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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