(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Facebook Inc.'s (FB) stock has fallen by more than 14% since the social network giant's disappointing quarterly report in July, and they may fall further as analysts slash their revenue and earnings outlooks.
The social media company reported better-than-expected results for the second quarter with earnings topping estimates by nearly 3%, while revenue came in line. However, it was the disappointing outlook for revenue growth and operating margins that sent shares down by more than 21%. Even worse, despite the steep decline, the stock is more expensive now than just a few months ago when it was trading at nearly the same price.
Estimates Get Slashed for Coming Quarter
The weak outlook has forced analysts to slash their forecast for the third quarter. Earnings estimates have declined by more than 13% and are calling for earnings to decline by nearly 4% versus last year. Revenue estimates have dropped as well for the coming quarter, by roughly 2.7%, and are still seen climbing by more than 33%.
Growth Rates Slow
The real damage was on the outlook for 2019 and 2020. Earnings estimates for 2019 and 2020 have declined by more than 10% and 14%, respectively. The steep decline in estimates brings down the big earnings growth rates investors had been looking for, with 2019 seen growing by roughly 14% down from 20% previously. Additionally, 2020 is forecast to grow by only 12% down from 17.5%.
Revenue estimates have also declined but not as sharply, with the outlook for 2019 falling by about 4.5%, and 2020 falling by 5.5%. Still, revenue growth is expected to be strong, at roughly 20 to 25%.
No Longer Cheap
With earnings estimates slashed so sharply, the stock's steep decline hasn't resulted in shares getting any cheaper. In fact, shares today at $186 are trading at more than 22 times 2019 earnings estimates, which is higher than the 21 times they were selling for in May when the stock was also trading around $186. Now, with the earnings growth rate in 2019 dropping so sharply, it is hard to argue shares are cheap at the current price when adjusting for growth, with a PEG ratio of about 1.5.
Facebook stock is facing many challenges as the company continues to work through issues of rising cost and stagnant user growth. For the stock to get back on track and begin climbing, the outlook for future revenue and earnings growth are going to need to improve in a big way.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.