Facebook’s share price could soar post Q4 earnings results, with some analysts suggesting that the stock is undervalued.
Facebook [FB] seems impervious to any negativity right now. Over the past 12 months, Facebook's share price is up 48%, outpacing the S&P 500's 25% gain. Anti-trust lawsuits, the Cambridge Analytica scandal, and criticism over its role in national elections, have failed to stop its growth. But will Facebook, the world's biggest social media site - or advertiser, depending on your point of view - deliver another set of bumper earnings results in Q4?
When is Facebook reporting Q4 earnings results?
What happened last quarter?
Q3 saw Facebook deliver earnings of $2.12 per share, beating the $1.91 analysts were expecting. Revenue also topped forecasts, coming in at $17.65 billion. Analysts had been expecting $17.37 billion. Monthly users came in at 2.41 billion, up 1.65% from the previous quarter. This was enough to see Facebook’s share price rise 5.18% in after-hours trading.
Number of Facebook's monthly users
Why should investors care?
Potentially undervalued share price
Seeking Alpha suggests that analysts are undervaluing Facebook. This makes earnings-fuelled correction even more likely. Seeking Alpha's analysis suggests that the current earnings trend suggest Facebook could deliver earnings per share of between $2.6 and $2.9 - higher than the predicted $2.5.
Facebook has form beating analysts’ earnings expectations, having crushed forecasts for eight quarters in a row. Doing so again wouldn't be a surprise.
Seeking Alpha also point out that the stock is "trading at 30% below its fair value, as per 2-stage discounted cash flow analysis."
Options markets suggests gains
Michael Kramer, founder of Mott Capital Management, suggests that options trading indicates Facebook’s share price could rise post results. Writing in Forbes, Kramer says: "The stock has seen some bullish option betting going into the results for the February 21 $210 strike price calls.
Since the beginning of the year, the number of open contracts has increased to 25,000, from approximately 11,700 contracts on January 2. It appears that the majority of the open interest increase occurred on January 10."
Strong advertising revenue
Facebook’s primary revenue stream is advertising. In 2018, advertising brought in 98.5% of Facebook’s $55.8 billion in revenue. For 2019, Factset believe it will represent 98.5% of $70.5 billion. Yet failing to tap new revenue streams could hamper its long-term growth prospects. Facebook’s decision not to advertise on Whatsapp - which has over 1.5 billion users - cuts off one potential advertising stream.
Facebook's revenue from 2019 - an estimated 98.5% from advertising
The social media giant will controversially continue to exempt political ads from its fact-checking, which, going into election year, should pay dividends. But shareholders will want to hear about how Facebook is innovating in areas like online payments and AI.
What are the expectations for Facebook’s Q4 earnings results?
Expectations are for Facebook to post $2.53 earnings per share, up 6.3% from the $2.38 seen in the same quarter last year. Revenue is expected to come in at $20.88 billion, up from the $16.91 billion seen in the same quarter last year .
Costs are likely to grow to between $54 billion to $59 billion, higher than 2019's $46 billion to $48 billion. According to Factset, monthly active users are expected to increase 7% to 2.49 billion.
|PE ratio (TTM)||34.84|
|Operating Margin (TTM)||34.49%|
Facebook share price vitals, Yahoo Finance, 27 January 2020
What’s the long-term outlook for Facebook’s share price?
Among analysts tracking the stock, the average 12-month price target is $245.45. That's a 12.6% upside on the current price. Of the 53 analytics tracking the stock on the Financial Times, 48 have a buy or outperform rating, 3 rate Facebook a hold and 2 have it at underperform. None rate Facebook a sell.
Monness Crespi Hardt analyst Brian J. White believes that 2020 could again be Facebook’s year. White has a $260 price target on the stock - a 19.3% upside on the current share price. In a note to investors on 21 January, White commented:
“Despite the challenging regulatory environment, growing antitrust scrutiny, ad targeting headwinds and transition to Stories [short user-generated photo or video collections], Facebook turned in a strong performance in 2019 and we believe the stock remains attractive.”
“Despite the challenging regulatory environment, growing antitrust scrutiny, ad targeting headwinds and transition to Stories [short user-generated photo or video collections], Facebook turned in a strong performance in 2019 and we believe the stock remains attractive” - Monness Crespi Hardt analyst Brian J. White