(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)
Facebook Inc.'s (FB) stock has been on a roller-coaster ride over the past year, with shares plunging in late March by over 20% amid user privacy concerns. But the losses soon disappeared, with shares surging to record highs. More gains may be coming as well, given Facebook's cheap valuation, which keeps getting less expensive as analysts up their estimates.
Since the start of the year, analysts have been aggressively upping their full-year earnings estimates for 2018 and 2019, and they see earnings growing by 23% in 2018 and 17.5% in 2019. Shares of Facebook trade at just 21.6 times 2019 earnings estimates, which come at a much cheaper earnings multiples than many of its technology peers.
The stock is currently trading at nearly its lowest earnings multiple in the past three years. The last time shares of Facebook were this cheap was in the spring of 2017. From the period of March 1, 2017, to the end of 2017, shares of the stock surged by more than 28%, which resulted in the one-year forward earnings multiple expanding to over 26.
Cheap Compared to Peers
When compared to many of its technology peers, Facebook also comes in below the group. In fact, the average one-year forward P/E ratio of the top 25 stocks in the iShares Select Sector SPDR Technology ETF (XLK) is 21.35, with a median of 22. But peers such as Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL) and Twitter Inc. (TWTR ) all trade at higher valuations than Facebook.
Analysts have been upping their earnings estimates for Facebook aggressively since the start of the year, for both 2018 and 2019. Since the beginning of the year, analysts have lifted their forecasts in 2018 by 14% and by nearly 10% for 2019. They now see earnings in 2018 growing to $7.58 per share and $8.91 per share in 2019, a growth rate of 23% and 17.5%, respectively.
It isn't just earnings estimates that have been rising. Revenue estimates have been climbing for the company, as well. Revenue for 2018 estimates have jumped by roughly 5.7% to $56.7 billion and 6.4% for 2019 to $71.8 billion, a growth rate of a stunning 39.4% and 26.7%, respectively.
There is no doubting that the outlook for Facebook continues to improve based on analysts’ expectations. Should that outlook continue to improve and grow stronger, then Facebook's stock should continue to see the benefits.
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.