Stock Spotlight

Facebook resilient under new threats

 

Facebook ($318; FB) enters the March-quarter earnings season with encouraging momentum. The shares have surged 23% in the past month, outperforming the 7% gain of the S&P 500 Index communication-services sector. Analysts expect Facebook to report per-share profits of $2.32, up 36%, and revenue of $2.36 billion, up 34%. Facebook has topped the consensus profit estimate in four straight quarters and the sales estimate in each of the past nine quarters.

One topic of investor interest will be the effect on Facebook’s business from Apple’s ($128; AAPL) new privacy changes, requiring applications to ask users for permission to use their unique Apple identifiers. Advertisers use these identifiers for targeted ads, a key revenue source for Facebook. Analysts at J.P. Morgan ($155; JPM) anticipate a minimal impact on Facebook, which appears better positioned than smaller rivals. Facebook, with a track record of successfully navigating tough terrain, is a Focus List Buy and a Long-Term Buy.

Still humming along

In the past year, Facebook has weathered advertiser boycotts, federal investigations, and stingier marketing budgets for its clients. Additionally, rising costs are cutting into profitability as Facebook devotes more resources to pay for news and root out misinformation. Facebook has pledged to invest at least $1 billion in the news industry over the next three years after running afoul of regulators in Australia and elsewhere. Separately, the company has 35,000 workers monitoring for dubious postings and removed 1.3 billion fake accounts in the December quarter alone.

Despite this environment, Facebook’s operating momentum continued to grind higher in 2020, with earnings per share rising 18% on sales growth of 22%.

Facebook spent about $6.3 billion on stock buybacks in 2020 to help offset dilution from executive stock awards. Excess cash also pooled on Facebook’s balance sheet, which ended 2020 with net cash of about $17.50 per share, versus about $15.51 per share in 2019.

Backing out that net cash lowers Facebook’s trailing P/E ratio to 30 from 32. The stock trades at 28 times estimated 2021 earnings, or 26.5 excluding net cash. Interactive-media stocks in the S&P 1500 Index have a median trailing P/E ratio of 37.

Stock buybacks will remain a priority in 2021. In January, management raised its share-repurchase plan by $25 billion, for a total of $33.60 billion, representing 54% of Facebook’s cash and 4% of outstanding shares.

Conclusion

For full-year 2021, Facebook is expected to increase earnings per share 11% to $11.17 per share on revenue growth of 25%. Both earnings per share and sales are projected to rise 20% in 2022, signaling optimism that rising costs could start to level off. Facebook has cautioned that growth could decelerate in the second half of 2021, as the company laps stronger year-over-year comparisons. Still, analyst estimates are still trending higher over the past 90 days.

Facebook Inc., 1601 Willow Road, Menlo Park, CA 94025; (650) 543-4800; investor.fb.com.

 

 

 

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