23% Rise Since End Of 2019, Will Facebook’s Stock Grow Further?
[Updated 01/12/2021] Facebook Update
Having grown by 23% since the end of 2019, Facebook’s stock (NASDAQ: FB) still has growth potential in the near term despite the stock price falling yesterday over fears of reduced future subscribers due to some political groups leaving the site. FB’s stock grew from $205 at the end of 2019 to $253 now, compared to the S&P 500 which gained 17% since the end of 2019. The company has seen high revenue growth over recent years, and its P/E multiple has also risen. We believe the stock, after the recent rally, has a good upside in the near term. Our dashboard ‘Buy or Sell Facebook’s Stock‘ has the underlying numbers.
During the Covid-19 crisis, Facebook saw its revenue rise by 16.7% in the first 3 quarters of 2020 as lockdowns drastically increased Active users over the first two quarters. In Q3 2020, Facebook beat consensus estimates for revenue recorded at $21.5 billion, up 22% y-o-y and earnings recorded at $2.75 compared to $2.13 in the same period of the previous year. Further, the company reported $24.7 billion of cash inflows from operating activities for the first nine months.
We expect Facebook‘s revenues to grow by 19% to $84.2 billion for 2020. Further, its net income is likely to rise to $27.5 billion, increasing its EPS figure to $9.61 in 2020. Thereafter, revenues are expected to grow further to $96.8 billion in 2021. In addition, the EPS figure will likely improve to $10.08, which coupled with the P/E multiple of around 32x will lead to Facebook’s valuation around $321, about 25% upside compared to the current market price.
[Updated 07/21/2020] 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.
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.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. With investors focusing their attention on 2021 results, the valuations become important in finding value.
What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
See all Trefis Price Estimates and Download Trefis Data here
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams