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Facebook’s Profit Estimates Just Got Slashed

Stock (Symbol)

Facebook (FB)

Stock Price

$152

Sector
Technology
Data is as of
May 30, 2017
Expected to Report
Jul 25
Company Description
Facebook, Inc. is a social networking company, products include Facebook, Instagram, Messenger and WhatsApp. The Facebook mobile app and Website enables people to connect, share, discover and communicate with each other on mobile devices and personal computers. Messenger is a mobile-to-mobile messaging application. Instagram is a mobile application and Website that enables people to take photos or videos, and share them with friends and followers. WhatsApp is a mobile messaging application and allows people to exchange messages. Source: Thomson Financial
Sharek’s Take
David SharekFacebook (FB) just had its profit estimates slashed. I read the company’s earnings transcript and found out why: Facebook is switching to generally accepted accounting principles (GAAP) next qtr, which brings down profit estimates. This move slashes profit estimates across the board. 2017’s estimate fell from $5.42 to $4.84, 2018’s from $6.69 to $5.99 and 2019’s from $8.37 to $7.90. More importantly qtrly profit growth estimates get slashed too, with profits now expected to climb an average of 6% the next 4 qtrs. Other than the accounting change, business is growing pristinely. Revenue jumped 49% last qtr with ad revenue climbing 51%. Managment has been saying for months that expenses will rise in 2017, now FB is saying they are expected to climb by 50%. If sales rise 50% and profits rise 50% that’s still good, right? Facebook’s move to GAAP accounting is a downer because I don’t feel individual investors or computers care if stock options are included in reported expenses. This move takes FB’s P/E up from the high-20s to the low-30s, and now the stock is more expensive. Furthermore, with profit growth expected to be slow the next year, the stock might lose momentum. I’m still high on this stock, but I really want profits to grow rapidly as they have been. Still, even with lower estimates FB is selling below my Fair Value.
One Year Chart
FB delivered 49% revenue growth last qtr with 69% profit growth which easily beat the 44% estimate. Qtrly profit Estimates fell dramatically and now are 14%, 6%, 10% and -8% for the next 4 qtrs. Looking at FB’s track record of beating the street, my guess is profits will grow between 20% and 30% the next 4 qtrs. The P/E was just 24 last qtr and is now 31 with the stock higher and 2017 profit estimates lower.
Fair Value
My Fair Value remains the same as it was last qtr: 35x earnings. That still makes the stock undervalued with a Fair Value of 169 this year. Business is still so strong that the stock is 38% away from next year’s Fair Value of $210 a share.
Bottom Line
Facebook has been on a steady move higher since it began putting ads into its newsfeed. The thing that amazes me is it’s still climbing even with the lower guidance. This company is the strongest out there, but in my rankings it has to take a step back as it no longer has perfect fundamentals, Facebook ranks 4th in the Growth Portfolio and Aggressive Growth Portfolio and 1st in the Conservative Growth Portfolio Power Rankings.
Power Rankings
Growth Stock Portfolio

4 of 31

Aggressive Growth Portfolio

4 of 16

Conservative Stock Portfolio

1 of 30

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