This includes, for example, the ad boycotts of the past - none of these ever led to a large revenue or profit decline. There will always be a reason to worry and some scandal or issue, but the market tends to overreact to these things that usually do not impact Facebook meaningfully. The same should hold true in the future as well. The stock recovered relatively quickly and started to climb to new highs, which resulted in steep gains for those that bought at the lows, while the market was fearful. Not surprisingly, not too much later, the market realized that none of these issues would doom Facebook and that the company was still executing very well. None of these issues, however, impacted Facebook's operations on a lasting basis, showcased by the fact that revenue and profits continued to grow as if there had been no scandal at all. This can be explained by weak sentiment, as the market worried about changes to the news feed on the Facebook platform, while other issues such as the Cambridge Analytica data collection scandal hurt sentiment as well. And yet, the market value of Facebook's shares dropped by more than one-third. Revenues continued to climb, and so did FB's earnings per share. Was this based on declining revenue and weak profitability? The answer is a resounding no - underlying growth remained highly attractive in that time frame: Take, for example, Facebook's share price decline in H2 of 2018, when shares dropped from $200+ to as low as $130. In Facebook's case, we have seen times when the stock price moved in a different direction compared to the business. ![]() In the long run, however, fundamentals and underlying cash flows and earnings decide whether a stock is going up or down. In the short term, stock prices can be driven by psychology, market sentiment, etc. But still, at an earnings multiple that is clearly below the long-term median, Facebook can't be called expensive today - even after an attractive 21% year-to-date gain for its shares. To some degree, that makes sense, as relative revenue growth and earnings growth were higher a couple of years ago versus today. Historically, Facebook was more expensive than it is today. We can also take a look at Facebook's historic valuation ranges in order to gauge whether the current valuation makes sense: In fact, I believe that Facebook, at 25x forward earnings and a revenue growth rate of 20%+, is more attractive than many stocks that trade at 23x forward earnings and that do not grow by anything close to 20%+ a year. Facebook trades at a small premium compared to the broad market, but that could very well be justified, based on Facebook's quality, moat, and compelling growth rates. Nevertheless, FB stock isn't really expensive, as shares are trading for 25x this year's expected earnings per share right now, which is pretty close to the S&P 500's ( SPY) 2021 expected earnings multiple of 23x (according to YCharts). In early 2021, shares had lagged the market, but more recently, Facebook's stock has experienced a sizeable uptick, and shares are trading very close to all-time highs today. Shares of Facebook have climbed by 45% over the last year, which is very close to the broad market's 42% total return over the same time frame. With shares trading at $335 each, Facebook is currently valued at around $940 billion, not far from the rare $1 trillion mark that has been breached by just a couple of stocks, such as Apple ( AAPL ) and Amazon ( AMZN ). is, thanks to massive profitability and a dominating position in social media, one of the highest-valued companies in the United States. ![]() This, combined with excellent fundamentals, a clean balance sheet, a healthy growth outlook, and an inexpensive valuation should result in considerable upside potential over the coming four years, although there are some risk factors that investors should keep an eye on. JuSun/iStock via Getty Images Article Thesisįacebook ( FB) is a dominant social media company in the markets it serves, and its moat makes it likely that it will continue to hold the top spots in this space with its social networks.
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