Stock (Symbol)

Facebook (FB)

Stock Price

$170

Sector

Technology

Data is as of

August 22, 2017

Expected to Report

Oct 31

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

Facebook (FB) is clearing a high hurdle this year. Last qtr management announced it would switch to generally accepted accounting principles (GAAP), and account for employee stock options in its profits. This brought profit estimates down around 75 cents a year across the board. So last qtr, the 2017 est. fell from $5.42 to $4.84, with qtrly profit Estimates declining from 44%, 34%, 23% and 21% to 14%, 6%, 10% and -8% in a single qtr. Then last qtr the company delivered an outstanding qtr and profits jumped 36%. Had management not used a more conservative accounting approach profits would have likely grown 60%. But still, 36% is excellent growth for a company this size. Also, this qtr 2017 estimates jumped from $4.84 to $5.33 — 49 cents a share, that’s incredible! With a P/E of 32 this stock is very reasonable, and I have a Fair Value P/E of 37 on the stock, which equates to $197 this year and $240 in 2018. Facebook just cleared a high hurdle. With Instagram now delivering ad revenue and whatsapp waiting in the wings to be a future catalyst, the future for the world’s largest social network is very bright.

One Year Chart

Last qtr FB delivered 45% revenue growth including 53% mobile ad growth. Mobile ads now account for 87% of total sales. Profits are expected to climb 26% this year, with 17%, 20%, -4% and 16% growth the next 4 qtrs. That’s a strong Est. LTG of 27% a year and the P/E of 32 is very reasonable.

Fair Value

My Fair Value rises from a P/E of 35 to a P/E of 37. There’s nice upside in these shares, but more importantly profit estimates just jumped so that could continue going forward. Excellent upside when we look out to next year. Also, the more conservative accounting should result in a better valuation (higher P/E) in the eyes of institutional investors.

Bottom Line

Facebook first broke out the qtr after it began putting ads in its newsfeed. That catalyst continues to power profits higher today, and now Instagram is picking up where Facebook left off. With online ads continuing to provide excellent bang-for-your-buck for advertisers, this stock is likely to continue on its current trend. FB ranks 2nd in the the Growth Portfolio and Aggressive Growth Portfolio and 1st in the Conservative Growth Portfolio Power Rankings.