Facebook once again delivered phenomenal growth numbers with profits and revenue up 69% and 45%, respectively.
Comparing Facebook’s projected growth with technology comparators; Google, Netflix and Amazon, collectively known as the FANG stocks, Facebook is far superior with a lower risk profile.
Facebook’s projected growth is greater than Google’s and just shy of Amazon’s yet has a P/E ratio that’s in-line with Google’s and a fraction of Amazon’s and Netflix’s.
On a relative basis, Facebook remains inexpensive as compared to these other large growth technology companies.
Facebook (NASDAQ:FB) recently announced earnings and once again delivered phenomenal growth numbers across the business with profits and revenue up 69% and 45%, respectively. Previously, I authored an article “The Most Compelling FANG Stock” and put forth my thesis that Facebook was the superior FANG stock considering its growth and valuation relative to its FANG cohort. Based on its Q2 earnings, these numbers only reinforce this thesis. Facebook had been on an uptrend heading into earnings and broke through $175 after earnings were announced.
The stock has since cooled off a bit and currently sits at $168 per share while the stock is up 46% YTD. These numbers may seem staggering and some may contend that buying at these levels would be cashing the stock. Normally, I would agree with this assertion; however, I think Facebook is an exception to this backdrop. Even at these levels and YTD appreciation, factoring in Facebook’s projected growth with technology comparators such as Google (GOOG) (NASDAQ:GOOGL), Netflix (NFLX) and Amazon (AMZN), collectively known as the FANG stocks, Facebook is far superior with a lower risk profile.
Facebook’s projected growth is greater than Google’s and just shy of Amazon’s yet has a P/E ratio that’s in-line with Google’s and a fraction of Amazon’s and Netflix’s. I feel that Facebook represents value even after this massive run and I maintain my long thesis.
The superior FANG stock:
Facebook trades at ~$168 per share with a P/E ratio of 38 and a PEG ratio (P/E ratio divided by growth rate) of 1.38 suggesting an annual growth rate of 27% in EPS. EPS at the end of 2016 was $3.56 thus factoring in a 25% premium we would theoretically arrive at $4.45 at the end of 2017. However, Facebook has already surpassed this estimate and currently sits at $4.47 EPS with two more quarters remaining in FY2017. Assuming Facebook continues to trade at a P/E of ~35, this translates into a stock price of $195 per share by this time next year.
I think Facebook could post earnings closer to $5.00 per share this year so this is likely conservative. Currently, similar high growth technology companies such as Google, Amazon and Netflix currently possess a less favorable profile when looking at the P/E ratios and growth rates (Figure 1 and Table 1). Facebook's projected growth is greater than Google's and just shy of Amazon's, yet Facebook has a P/E ratio that's in-line with Google's and a fraction of Amazon's and Netflix's. On a relative basis, Facebook is inexpensive as compared to other large growth tech companies that make up the FANG cohort.
Figure 1 – Author's graphic of EPS growth rate (derived from PEG ratio) versus TTM P/E ratio.
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