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Time to Buy Facebook (FB) Stock After Earnings Despite Political Worries?

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Facebook (FB - Free Report) shares have jumped 11% in the past month and the social company recently topped quarterly estimates amid ongoing political scrutiny. The question is should investors buy Facebook stock right now?

Q3 Overview

Facebook’s Q3 fiscal 2019 sales jumped 29% to hit $17.652 billion and top our estimate. FB’s adjusted quarterly earnings of $2.12 per share also crushed our $1.91 per share and marked a 20% climb from Q3 2018.

Perhaps more importantly, Facebook’s daily active users surged 9% to 1.62 billion, while MAUs popped 8% to 2.45 billion. Facebook’s monthly expansion matched Q1 and Q2, while DAU’s growth rate came in 1% higher. This helps prove to Wall Street and investors that people still want to be a part of Facebook despite all of the negativity surrounding the social media company and CEO Mark Zuckerberg.

Facebook doesn’t break out its specific platforms, but there is no doubt that its 2012 purchase of Instagram for just $1 billion has proven to be a steal. Facebook now expects that roughly 2.7 billion people use at least one of its “Family of services” each month, which includes its namesake platform, Instagram, WhatsApp, and Messenger.





The Backlash & Everything Else

Facebook has been under fire in Washington for nearly two years now. Zuckerberg’s company this summer paid a historic $5 billion Federal Trade Commission fine and still faces further antitrust reviews as part of a larger U.S. government probe into tech giants.

The company’s founder and chief executive recently spoke in front of the House Financial Services Committee about Facebook’s plan to dive into cryptocurrency. Regulators are against FB’s plans to roll out a blockchain-based cryptocurrency known as Libra, and roughly one-quarter of its original partners, including the likes of Mastercard MA, PayPal (PYPL - Free Report) , and Visa (V - Free Report) have backed out amid the political pushback.

Zuckerberg still wants to go forward with the cryptocurrency. But even if these plans fall through, Facebook as it currently exists is invaluable to advertisers and marketers around the world.

FB, which makes roughly 99% of its money from advertising, is poised to become even more important as consumers become harder to reach in the non-ad supported streaming world that features Spotify SPOT, Netflix (NFLX - Free Report) , Amazon (AMZN - Free Report) , Apple (AAPL - Free Report) , and soon enough Disney (DIS - Free Report) , AT&T (T - Free Report) , and Comcast (CMCSA - Free Report) .

For instance, Facebook is projected to remain the world’s second-largest seller of digital ads in 2019, behind only Google (GOOGL - Free Report) and in front of Chinese e-commerce powerhouse Alibaba (BABA - Free Report) . Plus, digital advertising is expected to climb from 46% of the total global ad market in 2018 to 60.5% by 2023, according to eMarketer.





Investors should note that Zuckerberg came under fire for his recent decision to continue to allow uncensored political ads to run across Facebook’s various platforms. Twitter (TWTR - Free Report) CEO Jack Dorsey, then announced, in a seeming effort to stand in contrast to its much larger rival, that it would ban political ads. Yet, TWTR stock has plummeted nearly 30% since it posted disappointing results on October 24.

Zuckerberg took a stance that he acknowledged might put the company in the spotlight during the 2020 election cycle and spoke relatively openly on Facebook’s earnings call about being on the side of free expression. The CEO also noted that FB will “make structural changes and build a rigorous privacy program that will set a new standard” for the industry as part of its FTC settlement.

His whole opening statement on Facebook’s conference call focused on the decision to run pollical ads. Zuckerberg noted that it was not about money, given that the company estimated that “ads from politicians will be less than 0.5% of our revenue” in 2020. “In a democracy, I don't think it's right for private companies to censor politicians or the news,” Zuckerberg said.

Q4 Outlook & Beyond

Facebook makes roughly 50% of its money in the U.S. and Canada and nearly 25% in Europe, even though most of its user growth now comes outside of these more saturated markets. Still, Facebook’s MAUs in Europe jumped from 375 million in Q3 2018 to 387 million, and 2 million sequentially. Meanwhile, its U.S. and Canada base climbed from 242 million to 247 million and 3 million from last quarter.

On top of that, the Menlo Park, California-headquartered company’s average revenue per user hit $7.26, up 19%. This is a vital metric that investors should pay close attention to.

Looking ahead, our current Zacks Consensus Estimates call for Facebook’s fourth quarter sales to jump 23% to $20.82 billion, with FB’s full-year fiscal 2019 revenue projected to climb 25.7% from $55.84 billion to $70.20 billion. The company’s 2020’s sales are then expected to climb roughly 22% higher to touch $85.42 billion.

It is important to note that both these estimates would represent Facebook’s slowest sales growth as a public firm. For example, FB’s 2018 sales jumped over 37%, with 2017 up 47% and 2016 up 54%. But Wall Street and traders have seen this slowdown coming and clearly accepted it, as no company can churn out that kind of growth forever.

Meanwhile, FB’s adjusted Q4 earnings are projected to pop 3.4%, while its full-year EPS figure is still expected to slip 16% as it spends to improve security, expand and more. With that said, Facebook’s fiscal 2020 earnings are expected to soar over 48% above our 2019 projection.





Bottom Line

Facebook has seen its earnings revisions trend in the wrong direction following its Q3 release and FB stock is currently a Zacks Rank #3 (Hold) that sports an “A” grade for Growth in our Style Scores system. And despite its 48% climb in 2019 and 30% jump in the last 12 months, Facebook closed Friday over 7% below its 52-week highs.

On top of that, FB’s valuation picture remains strong at 20.6X forward 12-month Zacks Consensus earnings estimates. This marks a discount against its industry’s 25.9X average and its own three-year median of 23.3X and 35.5X high.

Therefore, those who can deal with some of the political uncertainty might want to take a bite out of FB stock.

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