Facebook, Inc. (FB) is the leading global social media company. Its flagship product is Facebook, but it also owns other popular social media platforms such as Instagram, Messenger, and WhatsApp.
The main value for FB comes from its massive user network and addictive nature. As of March 2021, FB had 2.85 billion monthly active users and 1.88 billion daily active users. With so much of the global population frequenting the platform and voluntarily providing the company with an immense amount of personal data, FB very effectively monetizes its platform by offering businesses a remarkably cost-effective advertising channel. (See FB stock charts on TipRanks)
In its most recent quarterly report, FB posted extremely strong results. Revenue was up a whopping 47.55% year-over-year and earnings-per-share crushed expectations. Advertising revenue was up 46% year-over-year as platform use and monetization techniques continued to improve. Also, total costs and expenses grew 25%, allowing for an incredible 1,000 basis point improvement in the operating margin. At 43%, operating margins are quite impressive. All of this combined to generate 93% year-over-year earnings-per-share growth.
In addition to the company’s very wide moat and extremely impressive growth numbers in its latest quarter, the stock looks quite attractively priced. The forward EV/EBITDA ratio is a very reasonable 15.08x, which is below its historical average of 16.41x. Additionally, the price to normalized forward earnings ratio is 26.77x, which is both well below the average in the S&P 500 as well as its historical average of 33.52x.
Even better is that its revenue is expected to continue growing at a brisk pace this year and next, with 34.6% growth expected this year and 19% growth expected in 2022. Meanwhile, normalized earnings-per-share should also maintain strong double-digit growth this year.
Facebook’s balance sheet also remains extremely strong, as the company has over $64 billion in cash and short-term investments on hand with no long-term debt. The company’s returns on equity, capital, and assets are all very strong and its current ratio is a very conservative 6.08x. As a result, there is basically no risk of financial distress for FB and it enjoys immense flexibility to invest opportunistically to drive long-term growth.
Wall Street’s Take
From Wall Street analysts, FB earns a Strong Buy consensus rating based on 29 Buy ratings, 4 Hold ratings, and 1 Sell rating in the past 3 months. Additionally, the average Facebook price target of $390.47 puts the upside potential at 10.08%.
Summary and Conclusions
FB has a lot going for it right now, as it is riding strong momentum in terms of platform and advertising revenue growth. Additionally, its moat is virtually unassailable by any major competitors in its target markets. Last but not least, its valuation looks very attractive compared to its many strengths and its fortress balance sheet.
That said, the company has been targeted heavily by politicians for various ways in which the company and some of its users have manipulated the social influence of the platform. Politicians have accused Facebook of trying to skew public opinion, especially in the political arena. Furthermore, there is also risk of anti-trust legislation being slapped on the company at some point in the future, which would hurt shareholder returns.
As a result, while the stock certainly looks attractively priced right now and Wall Street appears overwhelmingly bullish on its prospects, investors should remember that there is no such thing as a risk-free investment and allocate their hard-earned savings accordingly.
Disclosure: On the date of publication, Samuel Smith had no position in any of the companies discussed in this article.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
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