Is Facebook Inc (FB) still a "buy"?

Is Facebook Inc (FB) overvalued in the current market like other tech giants?

facebook twitter linkedin


Facebook, Inc. (NASDAQ: FB -- $252.53) is a social media giant and one of the big five tech companies alongside Amazon, Apple, Google, and Microsoft. Despite this title, Facebook is still on the cheaper side as compared to the rest of the “Big Five”. Facebook currently falls nearly $300 billion short of reaching the $1 trillion in market cap that Amazon, Apple, and Microsoft long surpassed. The company currently sits at a market cap of $719.4 billion. Only Google joins Facebook under the $1 trillion mark, with a market cap of $989.74 billion. With such potential for growth, it is difficult, on the surface, to see why Facebook is lagging behind in valuation.

Let's talk expectations and earnings. In the third quarter of 2020, Facebook is expected to grow its EPS slightly from 1.80 to 1.88 (4.5% increase) based on current expectations. Facebook is on a winning streak, beating out analyst expectations in three out of its last four quarterly earnings reports. The only miss was in the first quarter of this year. Further, Facebook has increased revenue in three out of the last four quarterly earnings reports. The decrease in earnings during the first quarter of this year has been attributed primarily to the large decrease in advertising revenue during the beginning of the coronavirus pandemic and shutdowns.

In the company's most recent quarter (second quarter of 2020), Facebook was expected to report a decrease in earnings of 1.39 from the 1.71 reported for first quarter. However, the company beat out expectations in a major way, reporting an increase of 5% (1.80 of EPS), indicating to investors a much faster recovery for the tech giant.

As far as company financials, Facebook is still on track to improve on its $18.485 billion in net income year-over-year as compared to 2019Facebook also proudly holds one of the best balance sheets, with $139.691 billion in assets and only $29.244 in liabilities.

FB stock currently stands at a seemingly high price/earnings ratio of 30.88. However, a P/E ratio of 30.88 for a tech company can be considered a bargain in the current stock market. As P/E ratios have become inflated, only few tech companies still represent decent value. Unlike Apple and Microsoft, whose years of high growth are primarily in the past, Facebook has yet to run its full course.  With acquisitions like Instagram, WhatsApp and Oculus VR, the company has shown investors its continued commitment to future growth, keeping Facebook on the short list for many investors.

Furthermore, Facebook’s current equity of $110 billion is nearly double the $59 billion it represented in 2016. Since 2016, the company has grown their balance sheet just as much as the company has grown revenue. Facebook's balance sheet is just one of many factors to consider when assessing the health of a company. Additionally, Facebook has the security of being a well-established company combined with its potential growth.

Regardless of the 66% growth FB stock has seen following the huge market dip in March, the company should still be looking at a market cap well over $1 trillion in the coming years. Aside from seemingly-regular stumbles with public social/political controversy, Facebook has sustained growth and has the potential to continue doing so well into the future.


A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earnings guide for Q3 before it's too late!


  
 
Special Offers from Schaeffer's Trading Partners