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Buy Facebook (FB) Stock Down 34% With Instagram Ads Set to Boom?

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Facebook (FB - Free Report) shares have surged 16% since Christmas Eve as the market tries to bounce back to start 2019. Despite this climb, FB stock still sits roughly 34% below its 52-week high. Meanwhile, Facebook’s dominance of the digital advertising market, along with Google (GOOGL - Free Report) , is only set to grow with Instagram’s popularity among advertisers set to soar.

Overview

Shares of Facebook closed regular trading Thursday at 144.20. This marked a 34% downturn from FB’s 52-week and all-time high of $218.62 per share. Shares of the social media powerhouse have tumbled since July on the back of continued user data concerns and slowing user growth. This alone could be incentive enough for investors to think about buying FB stock as the market seems ready to try to climb back, driven by post-Christmas gains from giants such as Amazon (AMZN - Free Report) .

Mark Zuckerberg and Facebook have had to deal with a large amount of political backlash in the U.S. and Europe for the company’s questionable handling of user data. But as we move forward, more government officials and the public might move on from Facebook and Twitter (TWTR - Free Report) as the privacy conversation widens in our quickly expanding digital age.

More specifically, Facebook is still an advertising powerhouse with 2.27 billion monthly active users across its platforms. Therefore, even if Facebook never gained another user its revenues would climb has marketers try desperately to reach consumers as Netflix (NFLX - Free Report) , Amazon Prime, and other non-ad supported platforms grab a larger portion of the entrainment market. Let’s also not forget that the on-demand streaming age is really just getting started, with Disney (DIS - Free Report) , Apple (AAPL - Free Report) , and other giants set to join.

 

 

Instagram

On top of Facebook’s continued pursuit of valuable live-streaming video content and augmented reality aspirations, the company’s photo and video sharing app has turned into a juggernaut of its own. Instagram’s share of the digital video budgets is set to double from 2018 to 2020, according to Cowen.

The app has become one of the top choices for adversities to introduce new brand campaigns that target the key thirteen to thirty-four-year-old market. Instagram “Stories,” which is a relatively new feature, has helped the platform become even more attractive to advertisers. Cowen also speculated that Instagram’s growth will help Facebook’s overall live video push.  

Outlook

Along with Instagram, Facebook’s core platform has remained a top destination for advertisers in search of those thirty-five and up. Looking ahead, our current Zacks Consensus Estimate calls for Facebook’s Q4 revenues to jump 26.4% to reach $16.4 billion, which would mark a slowdown from Q3’s 33% jump. Meanwhile, the firm’s fiscal 2018 revenues are projected to surge by 36.1% to hit $55.33 billion. This would also mark a sharp downturn from 2017’s 47% top-line expansion.

Peeking even further ahead, Facebook’s fiscal 2019 revenues are expected to climb 23.7% above our 2018 projection to reach $68.47 billion.

 

 

FB’s adjusted Q4 earnings are expected to slip 1.4% from the year-ago period to reach $2.17 a share. The company’s full-year fiscal 2018 earnings are still expected to jump 19.6%. But the firm’s adjusted fiscal 2019 earnings are projected to dip 0.3% below our current year projection.

Investors likely won’t be pleased with Facebook’s bottom-line outlook. With that said, we should remember that Facebook plans to spend billions of dollars to try to fix its user data, “fake news,” and misinformation problems. The company has said that its operating margin will likely fall into the “mid-30s on a percentage basis” over a more than two-year period—FB’s operating margin dipped from 50% in Q3 of 2017 to 42% last quarter.

Bottom Line

Facebook knows its earnings will suffer as it spends to make necessary changes to help it remain a viable internet giant for years to come. In the end, investors should simply ask themselves if they imagine that one of the most important and widely used communication platforms, with its relative stronghold over digital ad spends, won’t at least be able to return to its previous highs?

It is also worth noting that Facebook is trading at 19.5X forward 12-month Zacks Consensus EPS estimates. This marks a discount compared to its one-year high of 28.6X and both its five-year median of 34.9X and its five-year high of 67.9X. Therefore, we can say with some confidence that Facebook stock appears “cheap” at the moment.

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