Is Facebook, Inc. a Buy?


Facebook (NASDAQ:FB) is currently facing pressure from every angle. From government regulations, to internal operational challenges, to increasing competition, Facebook has a lot to deal with. Even so, the stock is trading near its all-time high price.

With so many challenges and a high price, investors may be wondering whether the stock is a buy. Let’s take a closer look at the company and determine whether it’s worth it.

Sign with a big thumbs-up marking the entrance to Facebook's campus.


Image source: Facebook.

Stepping up to the challenge

While Facebook’s numerous challenges could be pulling management in multiple directions, ensuring it doesn’t fully solve any of them, the company has done an admirable job stepping up as the pressure increases.

For example, Facebook CFO Dave Wehner began warning investors about ad load concerns nearly two years ago. He said it could result in a meaningful slowdown in revenue growth in the second half of 2017. That slowdown never came, and the company just posted 49% year-over-year growth in its advertising revenue for the first quarter.


That growth is supported by improving the quality and effectiveness of ad products, producing a greater return for marketers, and thus enabling them to pay more for an ad. Competitors like Snap (NYSE:SNAP) and Twitter (NYSE:TWTR) have also boasted ofimproving returns on investment for their ad products, but that seems to stem largely from significant decreases in ad prices, not necessarily improved ad performance. Facebook’s ability to continue improving its ad products will enable it to fend off the competition.

With regard to government regulation, Facebook has already enacted several changes following the enforcement of the EU’s General Data Protection Regulation (GDPR) in late May. Wehner was keen to point out Facebook isn’t the only one that has to make changes due to regulations, and policies like GDPR will impact the entire industry. So, from a competitive stance, regulation is relatively neutral.


Facebook’s competitive position remains extremely strong. It has a huge audience that’s still extremely engaged across its family of apps. It arguably has better data than other social networks like Snapchat and Twitter due to the high engagement and simply how people use Facebook’s various apps (telegraphing their likes and dislikes on every post).

Several long-term growth engines

Facebook is currently growing revenue at a great pace despite all of the above challenges, but investors wouldlike to see strong potential for continued growth in the long term. And Facebook ticks the boxes on that front.


First and foremost, Facebook is at the center of a megatrend, as advertisers shift their ad budgets to digital from other media. Digital advertising spend will account for the entire industry’s growth this year. Facebook andAlphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary Google are well-positioned to win the lion’s share of that increased spend in large part thanks to their audience reach. Twitter and Snap can’t compete with Facebook in terms of audience size, which makes Facebook a better option for advertisers looking for a simple way to reach as many people as possible.


Second, Facebook still has a portfolio of undermonetized apps. Instagram advertising is expected to see significant growth over the next few years as it offers the same targeting capabilities as Facebook with potentially better ad products that take up more screen real estate (and thus command more attention from users).

WhatsApp is just getting started with advertising and its paid enterprise features. Both are promising potential sources of revenue considering the size of WhatsApp’s user base (1.5 billion users).

Facebook is still in the experimental stage with advertising in Messenger, working on things like bots and promoted messages. Facebook also has several products that use the Stories format popularized by Snapchat, which it’s only just started showing ads in.


Finally, Facebook’s Oculus virtual reality (VR) division is at the forefront of VR technology. The company just released its first stand-alone headset, which could make the technology more mainstream. CEO Mark Zuckerberg is convinced VR is the next big computing platform after mobile, and he’s certainly positioned the company to play a big part in the technology.

Is the price right?

Despite its challenges, Facebook appears to be in a strong competitive position and it has a clear path to continued revenue growth. But trading near its all-time high, investors might think it’s too expensive to invest in despite the strong underlying business.


Valuation Metric

Facebook

Alphabet

P/E ratio

28.4*

30.3*

P/S ratio

12.8

6.85

EV/EBITDA ratio

19.9

17.7

Data sources: YCharts and company filings. *Adjusted for the impact of the Tax Cuts and Jobs Act.

Alphabet is the best comparable for Facebook. Twitter and Snap don’t have the same level of profitability or scale as Facebook or Alphabet, which makes comparisons in valuation between those two and Facebook pretty meaningless.

Facebook and Alphabet trade for similar valuations with regard to earnings. The market values Facebook’s EBITDA higher than Alphabet’s, but net income lower. The market values Facebook’s sales nearly twice as much as Alphabet’s, but without costs like significant traffic acquisition costs and other revenue sharing, Facebook’s operating margin is practically twice as high as Alphabet’s.

Compared to its closest peer, Facebook is trading at a fair price. And if you want in on the digital advertising megatrend, Facebook is one of your best bets. Even near its all-time high price, it’s a buy.