With shares down 22% year to date, including 15% over the past three months, there’s no question the enthusiasm investors once had for the social network giant has vanished. Aside from slowing growth, Facebook has succumbed to a number public relations fiascos, which as a result, has wiped out nearly two years of stock gains in just four months.
Amid the recent decline in the stock price, however, it can be argued that the punishment does not fit the crime. From my vantage point, fundamentally, Facebook is as strong as it was two or even three years ago. And it would seem the company, given its recent announcement to add $9 billion to its buyback authorization, recognizes this fact. The $9 billion adds to the $15 billion the company previously had authorized under the buyback program since it was initiated in 2017.
There are plenty of reasons for companies to initiate buybacks, or in this case, add to an existing one. The most obvious reason is they believe their stock price is undervalued. For quite some time, there has been an argument about the high valuations of FAANGs, including Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Google (GOOG , GOOGL). Collectively, they have taken massive hits to their market caps, each losing an average of almost 20%. Facebook, however, has been the hardest FAANG name hit.
Facebook stock is now priced at just 18 times fiscal 2019 earnings per share estimates of $7.45, which is about on par with the S&P 500 index. Facebook’s forward P/E is now about 14 to 16 point below where it was a year ago. Although revenue and earnings growth estimates have come down in recent weeks, the stock — currently trading at $137 — is nonetheless some 40% below its consensus price target of $194.
This means investors who buy the stock today will own Facebook at an enormous discount to its historical trading price. Is this what the company recognizes, prompting the $9 billion increase in the buyback authorization? That’s hard to argue with. While the market is consumed about slowing growth, the company also understands that its growth metrics (the ones that matter) have shifted.
Indeed, with 2.27 billion monthly active users as of Q3, the core Facebook platform is slowing a bit. It’s the law of large numbers. Still, as of the most recent quarter, time spent on the platform has surged from an average of 18 minutes per day five years ago to more than 50 minutes per day in 2018. Even more impressive is the fact that advertisers are now paying more for Facebook compared to five years ago, when looking at the Facebook’s revenue and dividing it by aggregate user hours.
All of this tells me that Facebook’s is not slowing down, only changing. “Maturing,” I might add. As such, investors would be wise to grow (up) with Facebook and recognize that the metrics of five years ago are not the ones that should be focused on today. Perhaps the key metric now is that there are $9 billion additional reasons to be patient and allow the stock price to recover.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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