Is Facebook Stock in 2021 Undervalued?
Facebook stock in 2021 might be one of the high-quality growth stocks in the market that is still undervalued. With its market capitalization of more than 1 trillion, Facebook absolutely crushed revenue and earnings estimates.
Daily active users easily cleared expectations. Revenues rose by their fastest rate since the second quarter of 2018.
The price of the Facebook stock in 2021 is also very good. It currently trades at a trailing P/E ratio of 22.43 which is much lower than SP500’s 28.87.
To see if Facebook stock is undervalued, let’s see how Facebook is doing at the moment.
Facebook Q3 Earnings Analysis
On October 25, we had the opportunity to see new earnings release for Facebook. The stock price fell sharply after the results were published.
But, Zuckerberg said how the quarter is good and the community grew.
“We made good progress this quarter and our community continues to grow,”
– Mark Zuckerberg
So what is the catch? Why did Facebook stock fall after good results? Let’s see what happened.
Total revenue which is $29 billion grew 33% Y-o-Y. Analysts predicted revenue at $29.5 billion. That is a miss.
EPS at $3.22 grew 30% Y-o-Y. Analysts predicted EPS at $3.20 – beat.
Moreover, MAU or monthly active users are reported to be 2.9 billion. This one was predicted to be exact. So we have miss, beat and the same. Not so bad.
In short, Facebook showed decent financial results. Additionally, the company announced is increasing its share repurchases by $50 billion. The company already repurchased $14.4 billion of its Class A common stock during the third quarter.
Obviously, expectations on the market were higher than the results. When expectations are not met, investors sell their stock. That happened now.
Advertising Makes 97% of Facebook’s Total Revenue
Facebook’s advertising revenue is generated by displaying ad products on Facebook, Instagram, Messenger, and third-party affiliated websites or mobile applications. Marketers pay for ad products either directly or through their relationships with advertising agencies or resellers, based on the number of impressions delivered or the number of actions, such as clicks, taken by users.
Other revenue makes less than 3%. Other revenue consists of revenue from the delivery of consumer hardware devices, net fees they receive from developers using their Payments infrastructure, and revenue from various other sources.
Fundamentals are Strong
| in millions $ | 2016 | 2017 | 2018 | 2019 | 2020 |
| Revenue | 27,638 | 40,653 | 55,838 | 70,697 | 85,965 |
| Net income | 10,217 | 15,934 | 22,112 | 18,485 | 29,146 |
| Free cash flow | 11,617 | 17,483 | 15,359 | 20,660 | 23,028 |
In the fiscal year ended December 30, 2021 revenue was $85,965 million, an increase of 21,6% year-over-year.
The increase in Facebook’s DAU (daily active users) is very interesting. They had incredible growth throughout 2020 where the increase from Facebook daily active users (DAUs) was 11% year-over-year. On average, they have 1.84 billion for December 2020. As of June 2021, Facebook has 1,91 billion daily active users on average.
As for EBITDA and net income, this is very healthy growth. Facebook undoubtedly has excellent financial indicators.
Based on Facebook’s second-quarter earnings released at the beginning of August, they show no sign of slowing down. Revenue grew year-over-year by 56% and net income by more than 100%.
| In millions $ | 2020 | 2021 |
| Revenue | 18,687 | 29,077 |
| Net income | 5,178 | 10,394 |
Facebook Stock in 2021 Could Be a Good Opportunity for Value Investors
Facebook stock’s valuation is still very conservative. The company trades at 27 times earnings even though the analyst forecast calls for earnings per share to increase significantly.
The company recently crushed analyst estimates when it reported its second-quarter results. Revenue surged 56% year over year to $29 billion, leading to a 100,7% increase in net income.
Furthermore, Facebook handled a long list of challenges over the past few years and managed to keep growing and innovating.
There is a strong uptrend in daily active users who are using their products. I think these few reasons are very good reasons to buy.
There Are Also Some Obstacles to Future Growth
Facebook expects that the company’s year-over-year revenue growth rates in the third and fourth quarters would decelerate significantly, given that Facebook is moving from a phase of strong growth to normal growth
CFO, Dave Wehner, also pointed out that Facebook would face increasing ad targeting difficulties from regulatory and platform changes, especially Apple’s privacy changes on iOS, in the third quarter.
As a result, analysts expect Facebook’s year-over-year revenue growth to decelerate to 37% in the third quarter at $29.51 billion and 24% in the fourth quarter at $27.28 billion. For the full year, they expect its revenue and earnings to both rises about 39%, to $119.27 billion.
Many Superinvestors Bought and Sold Facebook in Q2 2021
Facebook stock in 2021 many sees as an opportunity in Q2 2021. Seth Klarman, William Von Mueffling, Bill Miller, Dodge & Cox all bought the Facebook stock last quarter.
However, there were more sales than buys from Superinvestors. 507,000 shares were sold by Chase Coleman, Stephen Mandel sold 676,650 shares, David Tepper 615 000 shares, John Armitage 546,000 shares. Also, there was Lee Ainslie, David Rolfe and fund Viking Global Investor who sold a smaller number of shares.
Should You Buy Facebook Stock in 2021?
Facebook’s mission is simple. They tend to give people the power to build community and bring the world closer together.
With this mission, Facebook has achieved amazing results. Facebook’s business is stable. It provided good cash flows, future growth and strong fundamentals. A further increase in daily active users is expected and there are currently no major obstacles in this business.
All things considered, I don’t think it’s too late to buy Facebook’s stock. The tech giant’s ability to weather its controversies and continue expanding is unbelievable. It looks like Facebook will continue to dominate the global social networking market for the foreseeable future. However, this is not financial advice, all decisions are yours alone.