Facebook, Inc. (FB - Free Report) has been under tremendous pressure following the uproar over its user data fiasco. Everyone has raised questions over how Cambridge Analytica, which worked on Trump’s election campaign, had gained access to personal data of roughly 50 million Facebook users without their knowledge. Traders dumped its shares fearing that the scandal would compel users to shift from the platform. In fact, shares of the Internet major saw a weekly decline of 14%, the steepest since 2012.
But does it make any sense for long-term investors to pull the trigger on Facebook shares at such low levels? After all, the tech titan isn’t that expensive. The company has an average trailing 12-month P/E ratio of 25.92, which is well below the Internet - Services industry’s average of 29.93.
Moreover, Facebook’s plunge is overdone, and the stock is actually a great buy. Here’s why.
Limited Number of Users Affected
Even though 50 million users sound a lot, it’s nothing when compared to the total of 2.2 billion monthly active users. Thus, only 2% of the platform’s users have been affected. And even for the 2%, nothing on their medical information or social security numbers seems to have been accessed.
This is just an isolated case and there is much ado about nothing. Especially, when the company’s expected earnings growth rate for the current year is a solid 16.4%, and 26.2% compounded annually over the next five years.
Facebook Bridges Gap With Google in Ad Revenues
Lest we forget, Alphabet Inc. (GOOGL - Free Report) and Facebook control around half of the ad market. Facebook is, in fact, steadily making up ground. In 2014, 37% of Internet advertising revenues went to Google, compared to Facebook’s 18%. But, the lead shrunk to 33% to 19% in 2015, 32% to 19% in 2016, and 32% to 20% in 2017.
It might take some time for Facebook to outdo Google, but the gap is closing fast. And there is little competition from other players. The next major competitor is Twitter, Inc. (TWTR - Free Report) , with just 4.4% share.
Meanwhile, there have been some concerns that the big consumer companies like Procter & Gamble (PG - Free Report) and Unilever plc (UL - Free Report) are trimming digital ads. However, analysts predict that digital ad spend will hit $376 billion in 2021, up from $228 billion in 2017. And if Facebook can gain 28% of market share by that time, it will earn $100 billion in revenues — a huge increase from last year’s $41 billion. So, there is still an encouraging runway ahead.
Facebook Stock Verdict
Facebook’s public relation issues have been going from bad to worse but this has made the stock cheaper than usual. The company is continuing to catch up with Google in the digital ad space that itself has been gaining traction. All in all, Facebook could gain more once it survives this controversy.
To top it, investors have seen 16 earnings estimate revisions move higher, compared with none lower, at least when looking at the key current year time frame. And the consensus estimate for Facebook has trended upward over the past 60 days, as estimates have risen from $6.61/share two months ago to just $7.17/share right now. If this wasn’t enough, Facebook flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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