Why Facebook’s Rally Is Lagging the Techs

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Facebook Inc. (FB) shares have soared over the past 52 weeks climbing by over 33%, but have fallen sharply with the broader market over the past couple of weeks. Shares of Facebook have declined by roughly 8%, since peaking on February 1 following the company's fourth-quarter results. But unlike the other members of the FANG's, Facebook shares have been much slower to recover off the lows seen on February 8, even lagging the Nasdaq 100. (For more, see also: Facebook: 7 Secrets You Don't Know.)

Since bottoming Facebook has only risen by roughly 3%, while the Nasdaq 100 and Amazon.com Inc. (AMZN) have climbed by about 7.5%, Alphabet Inc.'s (GOOGL) has increased by about 9%, and Netflix Inc. (NFLX) has soared by nearly 12%. Facebook's valuation took a big hit as a result of its one-year forward earnings multiple falling to roughly 20.5 times. The last time shares were this cheap was back in January of 2017, leading to a 53% rally in the stock. But looks can be deceiving because behind that low earnings multiple trouble may lurk. 

FB Chart

FB data by YCharts

Slow to Recover

The notion that Facebook stock hasn't snapped back like the other big technology names could indicate that investors are looking at other stocks for growth and turning away from Facebook shares, finding better values. Analysts are projecting 2018 earnings to grow by 17%, which comes in sharp contrast to expectations for a 36% increase in revenue, pointing to increased spending or rising cost. 

Rising Cost

During its latest, Facebook showed that daily active users in North America declined for the first time, falling by 1 million to 184 million from 185 million. The company also noted on its conference call it saw total expenses rising by 45 to 60% in 2018, a sharp increase from the 34% rise in 2017. Meanwhile, Facebook also noted capital expenditures in 2018 would be in a range of $14–15 billion, more than double the $6.73 billion in 2017.  

Looks Can Be Deceiving

The recent decline in the stock price has brought its one-year forward multiple down to roughly 20 times 2019 earnings estimates of 8.76, making shares of Facebook seem attractive at current levels. But that decline in valuation is a reflection of the increased spending and slower earnings growth. So despite what appears to be a cheap valuation—there may be a good reason behind it. (For more, see also: Why Facebook Stock Looks Like a Bargain.)

Of course, things can change should Facebook deliver better bottom line results, or costs turn out to be lower than expected—and that could help for the multiple to expand and lead to a higher stock price. 

But until Facebook can show investors that it has costs under control and is looking to drive profit, the low multiple on the stock comes with good reason. 

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 holdingsInformation 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.

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