Yahoo Finance Facebook's Growth Reaccelerates but the Stock Drops. Time to Buy?
Shares of Facebook (NASDAQ: FB) had been closing back in on all-time highs, but then came the second quarter of 2019 and the ensuing stock market pullback. Facebook stock has dropped over 10% since its July 24 earnings report, with investor pessimism fueled by worries about a global economic slowdown and continued scrutiny over the data practices of Facebook and other tech companies. A general slowdown in new user additions on Facebook has also been weighing on the stock.
This doesn't mean the company isn't a buy, though. In fact, after this most recent downturn, now looks like a good time to buy Facebook shares.
Friending the revenue trend
Facebook had been warning investors for the better part of a year to expect revenue to decelerate into 2020, and CFO David Wehner reiterated that outlook on the second-quarter earnings call. New rules limiting data gathering and beefing up privacy practices -- most notably the sweeping regulation on internet data practices known as General Data Protection Regulation (GDPR) in Europe -- are to blame.
But the company is still adding new users and finding new ways to increase the efficiency of its advertising platform, and year-over-year revenue growth clocked in at 28% in the most recent quarter, better than the previous quarter's rate of increase and following several quarters of a decelerating rate of growth. An anomaly? Perhaps, and I certainly wouldn't tell any investor to write off management's own outlook.
However, there is no denying that Facebook and its namesake app, along with Instagram, WhatsApp, and Messenger are attracting billions of users around the globe, and the company is always getting better at figuring out how to monetize that massive base. Facebook is nearing 2.5 billion monthly users, and Instagram has over 1 billion.
Period | Monthly Active Users on Facebook | YOY Change | Revenue | YOY Change |
|---|---|---|---|---|
Q1 2018 | 2.20 billion | 13% | $12.0 billion | 49% |
Q2 2018 | 2.23 billion | 11% | $13.2 billion | 42% |
Q3 2018 | 2.27 billion | 10% | $13.7 billion | 33% |
Q4 2018 | 2.32 billion | 9% | $16.9 billion | 30% |
Q1 2019 | 2.38 billion | 8% | $15.1 billion | 26% |
Q2 2019 | 2.41 billion | 8% | $16.9 billion | 28% |
Data source: Facebook. YOY = year over year.
The point is, even though decelerating revenue growth may feel uncomfortable, Facebook has a long way to go before it gets knocked out of the double-digit growth department.
Image source: Getty Images.
Liking the conversion to profits
Revenue is one thing, but how those sales translate into profits is another. It's on this front that Facebook has been particularly challenged this year.
Facebook has always been a big spender, adding lots of employees to support its ever-expanding network. But 2019 has been different, since it has had to ramp up spending to rework its privacy practices as well as pay a record $5 billion fine doled out by the Federal Trade Commission. Wehner said 2019 expenses should grow 53% to 61% compared with 2018, with the FTC fine accounting for 16 percentage points of that expected expense growth.
Sharply higher expenses aside, though, Facebook is still converting its top line into strong profitability expansion. (Even the FTC fine only represents little more than one quarter's free cash flow.) That trend should continue as full-year expense growth at the high end of expectations still implies a slowdown in spending the second half of 2019.
Period | Total Expenses | YOY Change | Free Cash Flow | YOY Change |
|---|---|---|---|---|
Q1 2018 | $6.52 billion | 39% | $5.05 billion | 33% |
Q2 2018 | $7.37 billion | 50% | $2.84 billion | (28%) |
Q3 2018 | $7.95 billion | 53% | $4.15 billion | (5%) |
Q4 2018 | $9.09 billion | 62% | $3.32 billion | (39%) |
Q1 2019 | $11.8 billion | 80% | $5.35 billion | 6% |
Q2 2019 | $12.3 billion | 66% | $4.84 billion | 70% |
Data source: Facebook. YOY = year-over-year.
After its second-quarter earnings release and subsequent drop in value, Facebook still isn't a cheap stock -- currently trading at 29.8 times trailing-12-month free cash flow. But this is the cheapest it's been since the beginning of 2019, when the market was still rebounding from an ugly end to 2018. Plus, the premium pricing is par for the course for a business that is still in high-octane growth mode.
Granted, there are still significant challenges for Facebook. Government regulators have the social media conglomerate in their crosshairs, and a data privacy overhaul will be an ongoing job that will likely keep expenses elevated. However, there is still a lot left in the tank for the business, especially as Instagram and other new social services on the primary Facebook app continue to keep billions around the globe returning to the site. The stock looks like a good pick for the long haul.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com
