Facebook is one of the largest and most influential social media companies in the world. With over 2.8 billion monthly active users as of Q3 2022, Facebook’s platforms including Facebook, Instagram, and WhatsApp have tremendous reach and impact globally.
As an investment, Facebook has seen its share price decline significantly in 2022 amidst a broader tech selloff, falling over 60% from highs. This has led many investors to question whether now is a good time to buy the stock at lower prices.
There are several key factors to consider when evaluating Facebook as a potential investment today: the company’s financial performance, user growth and engagement, competitive position, challenges and risks, and valuation. In this article, we will analyze these factors in detail to assess whether Facebook stock is a good buy at current levels.
Financial Performance
Despite the slowing growth of its core Facebook platform, the company has delivered strong financial results in recent years thanks to its diversified family of apps including Instagram, WhatsApp and Messenger. Some key highlights of Facebook’s financial performance:
– Revenue has grown steadily, rising from $40.7 billion in 2018 to $117.9 billion in 2021 – a compound annual growth rate of 47%.
– Operating income expanded from $20.6 billion in 2018 to $46.7 billion in 2021. Facebook’s operating margin has ranged between 32-39% over the past 5 years.
– Net income grew from $15.9 billion in 2018 to $39.4 billion in 2021, a compound annual growth rate of 39%.
– Facebook generates immense cash flow – operating cash flow rose from $25.1 billion in 2018 to $65.1 billion in 2021. This allows the company significant financial flexibility.
– The company returned over $71 billion to shareholders through buybacks and dividends from 2018-2021.
Revenue and Earnings Growth
| Year | Revenue (billions) | Revenue Growth | Net Income (billions) | Earnings Growth |
|---|---|---|---|---|
| 2018 | $40.7 | – | $15.9 | – |
| 2019 | $55.8 | 37% | $18.5 | 16% |
| 2020 | $85.9 | 54% | $29.1 | 57% |
| 2021 | $117.9 | 37% | $39.4 | 35% |
This strong growth in revenue and earnings demonstrates Facebook’s ability to monetize its massive user base through advertising and other services. The company has maintained high profit margins even with its aggressive investments in new areas.
User Base and Engagement
Facebook’s core platform may be slowing down in user growth, but the company’s overall family of apps continues to see robust user expansion globally.
– Facebook daily active users (DAUs) were 1.96 billion on average in September 2022, an increase of 3% year-over-year.
– Across the family of apps including WhatsApp, Instagram, and Messenger – the total number of daily active people was 2.93 billion on average in September 2022, representing an increase of 4% year-over-year.
– Monthly active users (MAUs) for Facebook alone were 2.96 billion as of September 30, 2022.
This demonstrates that while the core Facebook app has become saturated in many developed markets, there is still room for the broader ecosystem to grow – particularly messaging app WhatsApp and image sharing app Instagram in developing countries.
Engagement also remains very strong. For instance, in Q3 2022:
– Facebook daily active users represented 66% of monthly active users on average, meaning two-thirds of monthly users are active on the platform every day.
– Family daily actives accounted for 63% of family monthly actives on average.
– Time spent per day was approximately 24 minutes for Facebook daily users.
High engagement metrics like these support Facebook’s ability to generate revenue from its platforms. Advertisers are willing to pay for this level of sustained user attention.
Competitive Position
Thanks to the powerful network effects of its social platforms, Facebook enjoys a very strong competitive position. Key advantages include:
– **Massive user base and data:** With nearly 3 billion users across its apps, Facebook has unrivaled scale and troves of data to improve the user experience and target advertising. New entrants cannot easily replicate this position.
– **Stickiness and time spent:** As noted above, engagement metrics like DAU/MAU and time spent demonstrate the stickiness of Facebook’s apps and difficulty in getting users to switch platforms.
– **Leading advertising capabilities:** After Google, Facebook attracts the second most digital ad spend worldwide. Its advertising platform and targeting capabilities are state of the art.
– **Technical and financial resources:** Facebook generates over $100 billion in annual revenue and has leading engineering talent to sustain product innovation. Few companies can match these resources.
– **Acquisitions and investments:** Facebook has acquired major competitors like Instagram and WhatsApp. It also invests heavily in emerging technologies and apps threatening its dominance.
These competitive strengths make Facebook’s position very secure for the foreseeable future. The company faces limited direct competition for users’ attention and advertisers’ dollars in social media.
Risks and Challenges
However, Facebook does face a number of challenges and risks that could impact growth:
– **Slowing core platform growth:** The Facebook app has limited room left to expand users in mature markets. Daily active users were already flat to down in Q3 2022 in the U.S. & Canada and Europe regions.
– **Younger users shifting elsewhere:** Younger generations are favoring visual-first apps like TikTok and Snapchat over Facebook’s platforms. This threatens long-term engagement.
– **Reduced targeting and measurement:** Privacy changes on iOS devices and increased regulation may harm Facebook’s ad targeting and measurement capabilities.
– **Risk from Apple’s Ad Transparency prompt:** An iOS prompt asking users whether to allow ad tracking may significantly reduce Facebook ad revenue if users opt out of tracking.
– **Reputational issues and public scrutiny:** Facebook continues to get negative publicity around privacy, spread of misinformation/hate speech, and harm to teens from excessive social media use. These issues could lead more users to cut back on Facebook usage or prompt heavier regulation.
If Facebook fails to sufficiently adapt and evolve its platforms in response to these headwinds, its future growth and earnings potential may be lower than expected. But the company’s strong financial position allows it to invest heavily to pivot as needed.
Valuation and Expected Returns
Given the steep 60%+ decline in Facebook’s stock price in 2022, the shares appear attractively valued today for long-term investors. At around $130 per share currently, Facebook trades at a price-to-earnings ratio of just 12x forecast 2023 earnings per share of around $11. This is toward the lower end of the stock’s 10-year average P/E range of 18x to 36x.
Assuming Facebook can reaccelerate revenue growth back toward 20% annual rates via monetizing areas like Reels short-form video and commerce, the stock could potentially trade back up toward a P/E of 18-20x over the next few years. That would equate to a share price of $200-$220 based on estimated 2025 EPS of $11-$12.
This would represent upside of 50-70% from current levels over the next 2-3 years. Including its dividend yield of around 2%, expected total returns look quite attractive for long-term investors willing to withstand any near-term volatility.
Facebook Valuation and Return Forecast
| 2022 | 2023E | 2024E | 2025E |
|---|---|---|---|
| P/E Ratio: 12x | 15x | 18x | 20x |
| EPS: $10 | $11 | $11.50 | $12 |
| Share Price: $130 | $165 | $210 | $220 |
| 2-Year Return: – | 27% | 62% | 69% |
Conclusion
In summary, while Facebook faces some near-term headwinds around user growth and advertising, the company retains tremendous scale, strong engagement metrics, and leading monetization capabilities. At just 12x forward earnings after the huge sell-off, Facebook stock appears to discount a lot of the potential challenges.
Patient long-term investors are likely to be rewarded over the next 2-3 years as Facebook adapts its platforms to new challenges and returns to higher revenue growth. The stock’s current risk/reward profile looks compelling for those with a multi-year investment time horizon. Facebook remains a core holding to own for the long-term based on its dominant position in social media and online advertising.