Should You Buy Facebook Despite Its Rich Valuation?FB) reported another blowout quarter, easing past the earnings estimates consecutively for the second time. Facebook’s earnings growth has been impressive, but with the stock now trading at 52-week highs, is it still a buy?
As of writing, Facebook is trading at over 92 times trailing earnings and has a P/S ratio of 19. Given the valuation, many conservative investors may be cautious about buying the stock right now. However, I think Facebook can continue moving higher due to its growing earnings power.
The primary reason why Facebook’s earnings have grown at a tremendous pace has been the company’s ability to monetize platforms like Facebook and Instagram.
With Facebook expected to continue to dominate the space, investors can expect the number of people who want to advertise with Facebook to grow considerably in the future. Increasing the amount of ads will definitely add to Facebook’s revenue. However, it will be doubly beneficial for the company’s bottom-line, as Facebook will be able to charge more for ads amid the increasing demand.
As of the latest quarter, Facebook has 3 million advertisers (out of which 200,000 were on Instagram), which is impressive no matter how you look at it. Going forward, investors should expect the number of advertisers to grow, which, in turn, will lead to higher ad charges.
All in all, Facebook’s earnings power is strong, and although the stock’s valuation is rich, especially given its market cap of over $340 billion, I think it can easily justify its valuation by maintaining its astronomical earnings growth.
In addition, Facebook also has many other growth prospects like Virtual reality and mobile payment. Mark Zuckerberg has proven to be an exceptional CEO and Facebook investors should be confident both these new initiatives will further boost Facebook’s earnings.
Facebook has been the best-performing FANG stock this year and I expect the trend to continue. The growing number of people who advertise with Facebook will continue increasing and will boost the company’s earnings substantially in the long-run. Facebook’s high valuation is justified by the company’s strong year over year growth. Unless there’s a recession, I believe the stock can continue moving higher despite being near the 52-week high levels, which is why investors should be afraid to buy Facebook at the current levels.
Published on May 10, 2016By Akshansh Gandhi