Why Facebook’s Stock Drop Makes It a Better Buy
Facebook’s shares fell as much as 5.5 % in early trading on Thursday, wiping out about $20 billion of market value.
Which makes the stock an even better buy, analysts said.
The social network may have forecast slowing revenue growth and higher investments next year, but it remains a strong long-term bet, according to an overwhelming majority of brokerages.
Facebook’s third-quarter profit and revenue blew past analyst estimates on Wednesday.
But that was not enough for some investors, who drove down the stock to around $120 on Thursday, its lowest since July.
Investors appeared to be spooked by the company’s aggressive investment plans and a comment that limits on “ad load” would result in slower revenue growth in the current quarter.
By “slower” Facebook means less than the 56% growth the company managed in the third quarter.
Analysts also noted that Facebook’s comments on “ad load” and heavy investment in talent and data centers were not new and that there was nothing to suggest that the company’s spectacular run was coming to an end.
Ad loads are the number of ads that can be displayed to customers without alienating them. The issue is particularly important for Facebook since 90% of its users access the social network through mobile devices.
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Facebook said aggressive investment would continue in 2017.
“Clearly the market is spooked by FB’s 2017 commentary, but there was nothing new and certainly not anything that the market didn’t eventually expect to hear,” Susquehanna Financial Group analyst Shyam Patil said in a client note.
Piper Jaffray analyst Gene Munster, who reiterated his “overweight” rating, said Facebook was making the right investments, “which should pay off in spades during 2018+.”
Of 49 brokerages covering Facebook, 45 have a “buy” or higher rating on the stock.
Facebook had said after its second-quarter results that it expected lower ad revenue growth rates in each successive quarter in 2016 as ad load would grow only modestly.
Facebook has beaten revenue estimates for all three quarters this year, propelled by strong ad sales growth.
“There’s no doubt the business is performing much better than expected … and we think FB is just trying to keep expectations in check as we head into 2017,” Patil said.
Up to Wednesday’s close, Facebook’s shares had risen more than 21 =% since the start of the year.
That has made the stock pricey.
Facebook’s (FB) stock trades at nearly 34 times forward 12-month earnings, compared with Google-parent Alphabet Inc’s, 23 times and Apple Inc’s 13.5.
Google (GOOGL), whose advertising revenue increased 18% in the quarter, is Facebook’s chief rival for ad dollars.
“There are several consumer and ad innovations that should keep advertiser demand high (for Facebook),” said Canaccord Genuity analyst Michael Graham.
“We believe Facebook’s operating momentum, high growth and reasonable valuation continue to suggest it should be a core tech holding.”