Social media giant Facebook (FB, Financial) is having a dream run in the stock rallies that have been posted throughout the year. The stock has moved to $128.74 (closing in on its all-time high at $131.98) after hitting $92.47 in October 2015. This represents a rise of 39.22% over the last year and 25.94% year to date.
To gain some perspective of what this actually means for investors, it should be noted that the stock has outperformed the New York Stock Exchange by more than 1700 basis points for the calendar year.
The real question investors should be asking is why has all of this occurred, and are these trends likely to be validated by the fundamentals? It is worth reiterating that Facebook had record revenue of $17.93 billion and earnings of $3.67 billion in 2015.
Remember back to when Facebook had its initial public offering, and we could see that it was a tech stock that had been plagued by negative expectations? Even after posting returns of more than 230% since that initial public offer, the stock has sustained momentum.
Even at current levels, most analysts believe there is still upside left, and most of these arguments center on the fact that growth in the social network space for corporations is still being woefully underused.
Chart View: Facebook (FB, Financial) 1-Year Chart
Chart Source: BigCharts.com
This was followed by two fantastic quarters in the early parts of fiscal year 2016 that have gone far to fundamentally validate these trends in the minds of most sector analysts. More broadly, these trends are indicative of the convergences that have been seen in finance, funding and social media outlets. A growing number of sectors are being represented in these areas and are showing some of the most impressive results that have been seen in crowdfunding for real estate programs that have granted opportunities in markets that in the past could only be accessed by institutional investors.
Stock consistency
More specifically, in the second quarter of this year, Facebook posted $6.44 billion in revenues and $2.05 billion in profits on the back of better-than-expected performance over the previous period and an increase of 19.7% and 36.67% in revenue and profit when compared to the first quarter fiscal 2016.
In regional terms, markets in the U.S. and Canada are seeing flattening growth, but the company still holds a 69.7% revenue share in total social networking ads. It is true that Facebook’s market share in these areas has declined since 2014, but in order to be realistic about the overall trajectories seen here it should be pointed out that the company’s ad revenue has seen a year-over-year rise of 68% to $3.07 billion in the second quarter.
Other revenues remained flat at $135 million, but if we are comparing the performance to the stated intent of the company, it is clear that there is underlying strength here that is being overlooked by large sections of the market.
Broader view
When dealing with stocks like Facebook, it is important to take the broader view and remember that the company has managed to grow across the globe in ways that very few companies would be able to replicate -- with North American, Asian-Pacific and European users generating corporate revenue gains of 40%, 37% and 41%, respectively. This is widespread in areas that have shown legal opposition to the types of services that Facebook is making available to its users in recent moves.
Another positive for the stock is that the company holds $10 per share in cash and has no debt. Bears might argue that the stock is grossly overvalued as it is trading at a 61.89 P/E but in response, the bulls should be arguing that the year-on-year tripling of revenue and doubling of operating income is enough to justify that. This is largely why the analysts tracked by Yahoo Fnance expect Facebook to reach $156.40 by year end, and if these numbers prove accurate, then there is still an upside of 22% left in the stock.
The author has no position in any asset mentioned.
