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Facebook Stock is Downright Cheap

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Finding bargain stocks in today’s market is like finding a needle in a haystack. Most growth companies that are performing well are trading at high valuations. Meanwhile, many stocks that look cheap on a valuations basis are increasingly looking like value traps. However, there are diamonds in the rough. Facebook in particular seems to be very cheap.

Facebook stock trades a very low forward PE multiple of 26 times earnings considering analysts currently estimate FB’s 5 year growth rate of 35% per year. For comparison let’s take a look at Nike, Starbucks, Mastercard and Google (Alphabet).

 

Stock                  Forward PE           5 year estimated growth              Forward PEG ratio

FB                      26.1                          32.3%                                              0.81
NKE                   25.1                          12.6%                                              1.99
SBUX                 26.9                         18.2%                                               1.48
GOOGL             18                             16.4%                                              1.1
MA                     21.4                          15.5%                                              1.38

 

Looking at the chart above, the company with the lowest forward PEG ratio is Facebook. This means that valuation of Facebook shares in relation to its estimated growth is the most appealing of the group. In fact Starbucks has a higher forward PE ratio than Facebook (26.9 for SBUX vs. 26.1 for FB) and much lower estimated growth (18.2% for SBUX vs. 32.3% for FB).

Another factor to take into account is that Facebook has beaten earnings expectations every quarter since being a public company. In its most recent earnings report, Facebook crushed estimates on both the top and bottom lines. With Instagram advertising likely to ramp up aggressively over the next few years, it is likely that Facebook’s extraordinary growth will continue.

Analysts continue to be very conservative in estimating Facebook’s growth. In fact for 2017 analysts are modeling revenue growth of 32%, a sharp deceleration from the 42% growth modeled for 2016. In our opinion this is too pessimistic. Facebook ads have a much higher ROI than competing ad formats, and the mobile advertising market is likely to continue to steal ad dollars from traditional ad formats. This should continue to lead to higher ad prices for Facebook.

In summary, Facebook represents a rare opportunity to buy one of the leading growth stocks in the market at a very reasonable price. Compared to other leading growth stocks in the market Facebook shares look undervalued. And the potential for FB earnings to beat expectations means that stock may actually be cheaper than its valuation implies.

 

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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