Does Facebook Have Upside In The Near Term?

After a 65% rise since the March 23 low of this year, at the current price of around $245 per share, we believe Facebook’s stock (NASDAQ: FB) has no upside left. FB stock has increased from $148 to $245 off the recent bottom, better than the S&P which increased by around 45%. The rise in stock price was helped by the Fed’s multi-billion dollar stimulus package announced on March 23rd which lifted market sentiments. The company recently invested $5.7 billion in Reliance Jio for a 9.99% stake in the telecom giant. The deal should help Facebook participate in the huge untapped potential in India with regards to its various services. The company has seen certain advertisers hit a pause on advertising asking the platform for policy changes. The policy changes includes, hiding or blocking content considered hateful or that could harm voting. Facebook’s stock price saw a fall on 26th June but has since recovered which suggests that the market doesn’t expect the company to be affected by the advertising pause movement. It is not expected to see a major hit in the revenue as a majority of the company’s revenue comes from small and medium-sized businesses.

The stock currently is 39% above the levels at which it was at the end of 2017 and it has already surpassed the pre-Covid (February 2020) high of $217. We believe that the company’s stock has little upside left. Our dashboard What Factors Drove 39% Change In Facebook Stock Between 2017 And Now? has the underlying numbers.

Some of the stock price rise in the 2017-2019 period is justified by the 74% growth in revenues. Facebook’s revenues increased from $40.7 billion in 2017 to $70.7 billion in 2019, mainly driven by growth in Advertising revenues. This was offset by a 33% decrease in profitability as net income margin declined from 39.2% in 2017 to 26.1% in 2019. This decline in 2019 was mainly because of a $5.0 billion FTC settlement expense recorded. On a per share basis, earnings increased from $5.49 in 2017 to $6.48 in 2019.

Stock price increased during this period as margins and revenue grew (and as 2019 margin decline was due to one-time expense), which led to a flat P/E multiple of 32x in 2017 and 2019. The multiple shot up this year and currently stands at 38x. We believe that the market is being optimistic about the Internet companies, which has led to a rise in valuations.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Notably, Facebook’s stock is up by about 19% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index was nearly flat. Despite the coronavirus pandemic the company saw a 18% growth in Total revenues for Q1 2020. Total Active users also saw a rise by 11% y-o-y. That said, lower consumer spending and consumption over the coming months could likely lead to lower demand for advertising as companies may focus more on core expenses.

In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, valuations become important in finding value.

Thus, with decent revenue growth over the years, and better than expected Q1 2020 earnings despite the crisis, this helped Facebook expand its P/E multiple to 38x currently. The company is expected to add close to $19 billion to its revenue over 2020 and 2021. As per Facebook valuation by Trefis, FB’s fair price estimate comes to $243.

While FB stock has little upside in the near term, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For greater insight in to the internet space, check out how Twitter and Snap have done over the last few years.

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