Stock (Symbol)

Facebook (FB)

Stock Price

$183

Sector

Technology

Data is as of

November 27, 2017

Expected to Report

Jan 30

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) delivered fabulous results last qtr, then claimed expenses would eat into profits in 2018. The company expects expenses to grow 45% to 60% in 2018, and analysts expect revenue to grow 33% in the year. Thus qtrly Estimates are for -5%, 15%, 7% and 12% profit growth in 2018. But then management lowered 2017 expense guidance from 40-45% to 35-40%. Clearly management is lowering the bar so it can easily hop over it. In other news, two qtrs ago the company switched its accounting to generally accepted accounting principles (GAAP) to account for employee stock options. This move slashed 2017 profit estimates from 28% to 14%. Then FB blew past estimates and now is expected to have 39% growth for the year. If it weren’t for the accounting change Facebook would likely be delivering 60% profit growth for 2017 — an incredible feat. Thus, I feel FB will continue to ovedeliver by a wide margin into the future. There’s still lots of growth opportunity here, as video takes center stage. Live video and ads in the middle of videos are the new growth engines. Plus, the company just announced it will have games on Facebook messenger, which shouldn’t be discarded as games account for a large portion of sales at some of the large Chinese Internet companies. Facebook and Instagram are pushing the company forward today, but there’s another opportunity in putting ads on Whatsapp that be utilized in the future. This stock has an Est. LTG of 27% a year, yet has a P/E of 28 when we look at 2018 profit estimates. With FB continuing to beat estimates, this stock could be selling for 20x what the company might make this year. My Fair Value is a P/E of 37, which equates to a $245 Fair Value in 2018 and $301 in 2019. FB is one of the best growth stocks in the world, and should be a top holding for both growth investors and conservative ones as well.

One Year Chart

Last qtr FB grew sales an incredible 49%. Profits rose 46%, which cruised past estimates of 17% (this was just 6% the qtr before after FB announced the switch to GAAP). The stock has climbed steadily during the last year, but the P/E is still just 28. In 2016 Q4 it was only 23, which was really cheap. Estimates are for 38%, -5%, 15% and 7% profit growth the next 4 qtrs, but I feel the company will continue to deliver +30% growth.

Fair Value

My Fair Value rises from a P/E of 37, which gives this stock solid upside into 2018 and beyond. Advertising on the internet is king, and there’s only two big players in the space in the US — Facebook and Google — thus these monsters will continue to dominate.

Bottom Line

Facebook’s numbers for 2018 don’t look great, but I put a higher emphasis on the momentum the company has going into the year. In the end this is clearly one of the tops stocks of our generation and it’s selling for just 28x 2018 profit estimates. I think management is lowering expectations going into the new year, and will continue to beat the street. I expect the stock to continue to do well, but investors should keep some cash on hand as the stock is a little extended on the ten-year chart and could be in for a correction in early 2018. FB ranks 4th in the the Growth Portfolio and Aggressive Growth Portfolio Power Rankings and 1st in the Conservative Growth Portfolio Power Rankings.