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Can Facebook (FB) Stock Mount a Comeback Amid Continued Backlash?

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Shares of Facebook (FB - Free Report) fell once again Friday, reaching lows not seen since the spring of 2017 as investors digest the latest Russia-related news surrounding the social media powerhouse. The question now is can Facebook make a comeback or will its slide continue?

Recent News

Facebook’s “fake news” and Russian interference scandals just keep coming. A New York Times report from Wednesday said that high-level Facebook executives overlooked signs of suspicious Russian activity on its platform. The story also noted that the embattled social media company tried to hide the scope of the problem to both the public and lawmakers, as well as try to push out negative stories about some of its fellow technology powers.

The report said that Facebook hired an opposition research firm to release damaging reports about both Apple (AAPL - Free Report) and Google (GOOGL - Free Report) . A fact that Facebook CEO Mark Zuckerberg didn’t dispute when he told reporters Thursday that the company has since parted ways with the firm Definers Public Affairs.

The Silicon Valley titan’s board also responded to the NYT report in a statement. “As Mark and Sheryl made clear to Congress, the company was too slow to spot Russian interference, and too slow to take action. As a board we did indeed push them to move faster. But to suggest that they knew about Russian interference and either tried to ignore it or prevent investigations into what had happened is grossly unfair.”

Clearly, the story is very complex and Facebook’s woes don’t seem like they will disappear anytime in the near future. But investors need to start asking themselves how these stories might really impact the company over the long-haul in order to determine what’s best when it comes to owning FB stock.

 

Facebook’s Spending

The number one issue that seems to have sent Facebook stock down amid this entire 2018 decline is spending. More than slowing user growth and worries that people mistrust Facebook, the true crux of the matter might rest on profit margins.

Facebook executives, in a now infamous second-quarter earnings call that caused FB stock to tank, detailed how its operating margin would begin to slide as it spent more money to combat the problems plaguing the platform.

Facebook projected that its operating margin would slip into the "mid-30s on a percentage basis" over a more than two-year period. We should note that this has already started to happen, as FB’s Q3 operating margin fell from 50% in the year-ago quarter to 42%.

The company has responded to these “fake news” and misinformation issues by upping its security and monitoring budgets. Zuckerberg has said that combating these platform manipulation problems will take years and billions of dollars to fix.

Facebook even recently announced that it plans to set up an independent body to help it decide what to do with worrisome content. Yet, Facebook’s CEO pointed out that the company has had to deal with huge changes before, such as moving from a PC-based platform to mobile.

With that said, Facebook posted adjusted Q3 earnings that jumped 10% to reach $1.76 per share to crush our Zacks Consensus Estimate that called for an 8% year-over-year decline. Facebook’s bottom-line beat and expansion came even as its costs and expenses soared 53% from $5.21 billion to $7.95 billion.

Outlook

Looking ahead, Facebook’s fiscal 2018 revenues are projected to jump 36% to reach $55.33 billion, based on our current estimate. Jumping to fiscal 2019, the company’s revenues are expected to climb roughly 24% above our 2018 estimate to $68.51 billion. Maybe more importantly, the firm’s adjusted 2018 earnings are expected to jump 19.3%, while fiscal 2019’s EPS is projected to pop just 1.4%.

Clearly, we can see that spending issues look like they will dramatically impact Fakebook’s bottom line in the relatively near future. With that said, Facebook is in a strong position to spend since firm carries literally zero debt at the moment. Plus, we can see that the company has plenty of money to spend.

Bottom Line

Facebook stock sat at roughly $138 per share through late morning trading Friday, down over 4% on the day and 37% from its 52-week and all-time high of $218 per share. FB’s decline has it trading right near its all-time low forward P/E at 19.3X, which falls below its industry’s 29.5X average and not too far above the S&P 500’s 16.4X.

The social media firm also currently estimates that more than 2.6 billion people use Facebook, WhatsApp, Instagram, or Messenger each month—or roughly 35% of the global population.

Facebook closed Q3 with 2.27 billion monthly active users, up 10% from the third quarter of 2017. In the end, advertisers will continue to flock to Facebook as the likes of Netflix (NFLX - Free Report) and Amazon (AMZN - Free Report) , and soon enough Disney (DIS - Free Report) , steal more people away from ad-supported TV.

Facebook could also theoretically start to pay a dividend at some point down the road. But the prospect of government intervention still hangs over its head and its stock price continues to tank. Therefore, even though many of the fundamentals are in place to help Facebook stock climb once again, it is hard to know when that might start with no bottom in sight. 

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