Is Facebook The Cheapest Stock On Wall Street?
As a value investor, I seek to invest in companies which have large market share, solid growth, and trade at a compelling valuation. However, these investments are rare because most times companies with these characteristics trade at very high valuation multiples, repelling most value investors. Facebook (NASDAQ: FB), the most dominant social networking company in the world, features not only blistering growth, but trades at a surprisingly low valuation based on 2018 estimated earnings.
Many investors might be surprised to learn there are many stocks that are more expensive than Facebook based on expected calendar 2018 earnings, despite growing at slower rates. For example, even though Google is a more mature company with a slower growth rate, it is more expensive than Facebook based on 2018 earnings. Google is expected to grow earnings 18.8% for the next 5 years and trades at 23.2 times 2018 earnings estimates; while FB’s expected 5-year growth rate is 23.5% and its 2018 PE is 22.7.
Even more surprising are Microsoft (NASDAQ: MSFT) shares, trading at 20.9 times 2018 earnings despite its estimated 5-year growth rate of 10%. This growth pales in comparison to both Google and Facebook, yet Microsoft trades at a similar valuation.
A look at the consumer staples sector’s valuations show even more striking examples of stocks with low growth rates trading at similar valuations to Facebook.
Proctor & Gamble (NYSE: PG), Coca Cola (NYSE: KO) and Clorox (NYSE: CLX) all trade at a premium to Facebook. It is perplexing because consumer staples are very low growth companies that should trade at a discount to dominant growth companies such as Facebook. The 5-year estimated growth for all three companies is less than 10%, and yet they all trade at a premium to FB based on estimated calendar 2018 earnings estimates. Coca Cola shares trade at 21.9 times 2018 earnings estimates despite only having an estimated 5-year growth rate of 4.8%.
The reasons for this situation can be partially explained by the fact that consumer staples names pay out very large dividends, to the tune of over 3% annually in many cases. These businesses are also fairly recession resistant and tend to have dominant positions in the categories in which they compete. One can make a valid case that KO, CLX and PG deserve to trade at their current multiples. However, if these valuations are reasonable for consumer staples shares, then Facebook shares deserve to trade much higher than their current multiples.
Time tends to fix valuation disparities, working in both directions. Under Armour (NYSE: UAA) Is a good example of a stock that enjoyed an extremely lofty valuation for years despite having a growth rate that did not seem to justify it. As time went on, as the market realized that the shares were too highly valued, Under Armour stock cratered. Facebook is in the complete opposite situation; Facebook shares continue to trade at a very low valuation compared to its earnings growth. As the market discovers that Facebook’s growth is being undervalued, its stock could continue to soar.
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
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