In July, the stock plunged 25% on a revenue miss and projected slowdown. However, earnings per share came in at $1.74 and revenue was up 42% year-over-year. Now, the stock has continued to sell off leading into the company's Tuesday's earnings release, after the closing bell.
However, it's hard to miss Facebook's long-term value when its stock is trading at just 18x next year's earnings, and the company is still growing. Out of the FANG stocks touted by Wall Street media pundit Jim Cramer, Facebook is by far the best bargain. The company's stock is trading at 52-week low thanks to data breaches and lower guidance. But with 2.23 billion monthly active users, the social network still offers a ton of value to its users.
It also has the largest captive audience of any big technology company, which could help it try out new products and services like Workplace, a Slack rival or Portal, a video messaging product for home use. The company has already made advances in virtual reality (VR) and artificial intelligence to be ready when the next market pivot happens. Eventually, the company must transition from ad sponsored content to recurring revenue elsewhere.
Do not forget that Mark Zuckerberg is still in his mid-30s with majority control of the company. Despite shareholders seeking to remove him as chairman, he'll still control the company's long-term future as he has about 60% of the voting power. With Zuckerberg at the helm, the future is going to be very bright for shareholders, especially those that are getting in now after the company's 33% summer pullback.
When I look around the marketplace, there are still so many stocks that are traded with outrageous price multiples, leaving me scratching my head wondering whether these companies will live up to the elevated values. On the other hand, Facebook has already gone through a correction with most of the negative news priced in.
The numbers don't lie
Facebook generates about $22 a year on each active user across its network. If the new offerings are successful, its gross margins will decrease, but the goal remains the same. Connect the world on a unified platform. Facebook profiles are still used for signup and login purposes at most major websites, plus a large number people still engage with the site. It's not just used for hate speech or election cycles. The value to advertisers is still higher than Google because of the data set at a better cost per click.
The real opportunity comes from Facebook's current challenges around data and privacy. Data breaches equated to less than 3% of its entire network. It's reportedly looking for an online security acquisition and with $40 billion in cash, there are many firms that could be useful additions. Compared to much more sensitive data that was taken from Equifax's data breach in 2017, which accounted for almost the entire working population of the U.S. (with 148 million people affected) Facebook's data breach seems relatively small. Also, what's more sensitive, credit information or family photos that you share with everyone anyway?
Facebook is massively undervalued
I don't need to see a chart to know that Facebook is undervalued. Currently, Facebook is in the process of building a library of premium content and monetizing it via ads or subscription revenue similar to YouTube or maybe even Netflix eventually. The entire goal is to keep people using its site so that advertisers want to pay up for that attention. Advertising revenue represents more than 90% of the company's total revenue, with 50% coming from the U.S. and Canada, and 25% from Europe. Over time, that will drop as the company starts to build new profit channels. Again, it has 2.2 billion active users. From a sales perspective, that is a lot of qualified leads.
Even when the next big thing takes off, the advertising pie will just get bigger similar to how having multiple screens hasn't caused the television industry to shrivel and die like some predicted. Personally, I don't put much information on my Facebook feed, but I do use Instagram a lot and the Facebook messenger app to communicate with my friends and family. Only time will tell if the company can keep its user's attention, but it's got a massive head start.
Growth will not continue at this torrid pace forever; however, in 2019 the company could earn $10 a share. Fast forward 10 years and that number could be $30 to $40 a share. I know that's expecting a lot and that anything is possible, but by then we will have multiple companies with market capitalizations well above a trillion dollars. I find it hard to imagine that Facebook wouldn't be one of them.
Disclosure: I am not long/short Facebook.
