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Facebook Shares Could Gain More In 2018 Than Its 55% 2017 Return

After a stellar 55% return in 2017, Facebook (NASDAQ: FB) shares have the potential to return even more for investors in 2018. With the company set to announce its Q4 2017 earnings after market close on Wednesday, January 31, investors will be paying close attention to not only how the shares perform against analyst expectations, but also how CEO Mark Zuckerberg communicates how changes to the firm’s growth engine – advertisements through its news feed – will impact future earnings.

Similarly to this point last year, Facebook enters the new year with muted growth expectations. Despite posting 47% revenue growth through the first 3 quarters of 2017, analysts expect FB to deliver revenue growth of only 33% in 2018. On the earnings front, analysts expect EPS to grow 14% in 2018.

Facebook management is consistently setting a low bar for itself and analysts, with the pessimism this time being pinned on increased spending to prevent the spread of fake news on the FB platform. This could reduce the bottom line if the spending is higher than expected.

Additionally, Facebook’s recently announced news feed change, in which it will prioritize posts from friends and family over posts from publishers and businesses, had driven down the stock 5% from recent highs. Investors who are selling FB on this news may have been overreacting. In an interview with Facebook’s VP of product development in charge of news feed, Adam Mosseri, agrees that investor fears may be overblown.

Facebook’s bet is that in the long run, businesses may pay more for ads because of the decline in inventory. Users may in fact increase engagement and share more over time – justifying the higher price of individual ads.

Although these concerns are worth noting, Facebook has made a habit of managing expectations from the analyst community. Last year the problem was a “meaningful slowdown” in expected revenue. Investors who bought FB stock despite that warning were rewarded handsomely.

Long-term market trends already in motion are also positively influencing Facebook’s ad pricing power. As the cable industry continues to struggle, Facebook is poised to continue benefiting from the shift of ad budgets from old media to new media. Instagram is continuing to increase in popularity and is rolling out more targeted ads on users’ feeds, and engagement rates have been strong. These trends augur well for FB’s ad business in 2018 and beyond.

The bottom line

The current average analyst 2018 EPS estimate is $6.72 for FB. But the highest estimate is currently at $7.73.

A 40 p/e multiple on the high estimate of $7.73 gives an estimated 1-year price target of $309 per share for Facebook.

If FB shares did reach $309, it would represent a 76.5% return from its closing price on the last day of trading in 2017 returning even more for shareholders in 2018 than its lofty 55% gain in 2017.

 

 

Disclosure:

All of the ideas expressed in this article are the opinions of Ideal Asset Management LLC

Before trading on any of the information in this article, consider consulting your financial advisor to make it suits your financial goals

Ideal Asset Management owns shares of FB  for its clients

All investments carry the risk of loss

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