Does Facebook’s Stock Have 25% Upside Potential?

At the current price of around $288 per share, we believe Facebook’s stock (NASDAQ: FB) has about 25% growth potential in the near term. FB stock has risen by 120% since the end of 2018 compared to the S&P500 which has increased by 59% in the same period. Both revenue and earnings rose in 2020 as the Covid-19 pandemic pushed individuals and organizations toward e-commerce and a shift of demand toward products from discretionary services. These changes provided a boost to FB’s advertising business in the second half of 2020.

Facebook initially protested the change announced by Apple to its privacy policies, which is expected to be rolled out in early spring. The new policy will require device users to opt into sharing information with developers. However, last week the CEO suggested that it could make the company stronger in the long run as it improves its in-app retail options. Both the Covid-19 pandemic and the forthcoming iOS changes, have prompted Facebook to hasten its pace of rolling out e-Commerce features across its various platforms. Though, how Apple’s privacy changes will impact Facebook stock and the rest of the digital advertising industry is yet to be seen.

Over the recent years, the company has seen earnings rise while its P/E multiple has been fluctuating. Our dashboard ‘Buy or Sell Facebook’s Stock?‘ provides the key numbers behind our thinking.

Facebook’s revenue rose from $55.8 billion in 2018 to $86 billion in 2020. Net income margin fell from 39.6% in 2018 to 33.9% in 2020. On a per share basis, earnings went up from $7.65 to $10.22 while the company saw a 1.3% decline in shares outstanding.

During the same period, the P/E multiple jumped from 17.1x to around 26.7x. The P/E improved slightly in 2021 and is currently around 28.2x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This, in turn, increased the active users on social media sites and individuals and organizations shifted to e-commerce benefiting Facebook’s ad revenues. Facebook saw revenues increase by 22% to $85.9 billion in 2020. Earnings increased to $10.22 compared to $6.48 in the previous year.

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. Following the Fed stimulus — which 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, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. In 2021 we expect FB revenues to rise to $105.4 billion, up 22.6% y-o-y. Further, its net income is likely to rise to $32.6 billion, increasing its EPS figure to $11.53, which coupled with the P/E multiple of 31.3x will lead to Facebook’s valuation around $360 per share, up by 25% from the current market price.

While Facebook’s stock has an upside, if you think Apple stock is overvalued but still want to play the upside in Apple’s iDevices and the broader consumer electronics industry? Check out our theme on Apple Component Supplier Stocks.

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