Buy The Dip: Facebook's News Feed Shuffle Is A Buying Opportunity

Source: storyful.com

Facebook (FB) got knocked off its usual trajectory on Friday as information that Mark Zuckerberg was “overhauling” the social network’s news feed hit the wire. Investors were noticeably troubled by this development, as the stock sank by nearly 5%, closing under $180 for the first time since 2018 began. So, is the Facebook news feed shuffle likely to meaningfully impact the company’s top or bottom line? What about its growth rate? Should investors be concerned with the company’s future prospects? Or is this dip just another buying opportunity in the world’s greatest social network?

Facebook’s News Feed Shuffle: Is it Good or Bad for Business?

Let’s begin by addressing the minor correction Facebook had over the past few sessions. Why did it happen? Essentially, Mark Zuckerberg introduced an algorithm that will bring users family and friends-oriented content first, ahead of the business and news material we so often see first when we open our Facebook feeds.

Naturally, at first glance investors saw this as a net negative, quickly concluding that seeing personal content first would take away from Facebook’s commercial clicks and views, possibly leading to lower ad revenues. Moreover, many news outlets picked up this developing story and chose to portray it in a negative light. Some notable headlines like “Facebook’s startling new ambition to shrink,” “Facebook’s friendly focus another time waster” and so on are making it seem like Facebook is making a strategic misstep, when it is very likely that the opposite is true.

Who Understands Facebook’s Business Better Than Mark Zuckerberg?

It is important to acknowledge that Mark Zuckerberg is an accomplished CEO, who has continuously created significant value for shareholders throughout his tenure at the company. The insinuation that he has anything other than the best interests of his shareholders, and the company’s growth prospects in mind is unfounded and ludicrous. It is also evident that Mark Zuckerberg knows what he is doing, and there is likely no one who understands Facebook’s business better than he does.

Also, let’s not forget that Facebook first and foremost is a platform to connect with friends, family, and interests. Therefore, users inherently, consciously or subconsciously expect to see this content when they visit their news feeds. In actuality, being exposed to the family and friends-oriented content first is likely to entice users to spend more time on Facebook, because this is the material most people sign up to see when they join Facebook. Therefore, this strategy is likely to make users feel more comfortable, and when people are more relaxed they are far more receptive to secondary content and are likely to spend more time on Facebook in general.

Moreover, most people don’t go on Facebook to view news, and other commercial content, as they have plenty of other channels to receive this material. Therefore, when people are exposed to this substance first, before the family and friend portion of the story on their news feeds, people are likely to feel less comfortable, and will in general spend less time on their favorite social network.

I say this from a perspective of common sense, and from personal experience. Also, I believe it is important to give consumers what they want, which is what Facebook is attempting to do here. So, the initiative to tweak the algorithm makes perfect sense. This will ultimately make people feel more comfortable to be on Facebook, will enable users to spend more time on the social network, and will cause users to open up and to be more receptive to the news and various commercial content. Therefore, altering the news feed algorithm is a good business decision and will enable the company to earn even more ad-related revenue going forward.

Facebook: The Underestimated and The Unloved

Critics have been underestimating Facebook"s potential since its inception, and investors are still doubting the company’s CEO to make proper decisions. However, the results speak for themselves and clearly indicate that Mark Zuckerberg along with Facebook know exactly what they are doing. This is demonstrated by the company’s continuous stellar performance throughout its existence. So, it is difficult to imagine that at this key juncture in Facebook’s existence this dynamic would suddenly change. If anything, Facebook is gaining momentum right now, not losing it.

Facebook"s Unrivaled Domination in Social Networking

Facebook is clearly one of the most impressive and dominant internet companies in the world. Its presence as the overwhelming social networking juggernaut is staggering. The company has over 2 billion active monthly users. Moreover, as of Q3 2017 Facebook had 1.368 billion active daily users. In addition to these astounding numbers, Facebook Messenger and WhatsApp each has over 1.3 billion active users, and Instagram has over 700 million active user accounts. These are all in a market that is nowhere near fully saturated, suggesting there is plenty of future growth available for Facebook.

Source: sproutsocial.com

Source: techcrunch.com

Market Saturation Dynamic

The world’s population is roughly 7.6 billion, and only about 3.7 billion or approximately half of the world’s population use the internet. Moreover, only about 2.8 billion or 37% are active social media users, and just 2.6 billion or 34% are active mobile social media users. This indicates that Facebook’s 2 billion active monthly users represent a total penetration rate of just 26%, and Facebook’s 1.37 billion active daily users represent a total penetration rate of just 18%. The percentage of the world’s population using the internet is continuously growing. This is compounded by the fact that the global population is perpetually growing as well. Therefore, Facebook could experience continued market share growth for many years going forward.

Source: smartinsights.com

In addition, Facebook’s secondary segments Messenger, WhatsApp, and Instagram have significantly lower penetration rates. Messenger and WhatsApp have just 17% penetration rates each, and Instagram has a global penetration rate of just 9%, suggesting that robust growth should continue in these segments as well.

Source: oursocialtimes.com

Facebook: The Brand

Source: facebook.com

In addition to owning some of the most lucrative and best-known businesses in social networking, Facebook’s brand has become extremely valuable in recent years. According to Forbes, Facebook now has the 4^th most valuable brand in the world, with an estimated value of $73.5 billion, an impressive 40% increase on a yoy basis. Having a strong brand name, coupled with a powerful image, gives Facebook significant advantages in relation to its adversaries going forward. This also increases Facebook’s prospects for continued future growth in various businesses and segments.

Facebook: Valuation Analysis

Market Cap: $521 Billion
2017 P/E Ratio: 30
2018 P/E Ratio: 26 (EST)
Profit Margin: 42%
Quarterly Earnings Growth yoy: 79.2%
2017 Revenue Growth: 45.4%
2018 Revenue Growth: 33.5% (EST)
Total Cash: $38 Billion
Total Debt: $280 million
Short % of float 0.93%

The valuation analysis suggests that at 26 times this year’s projected earnings, Facebook is relatively cheap. Especially considering that the company will grow revenues by roughly 33.5% this year and should continue to experience significant revenue growth in 2019 and beyond. It is also important to point out that Facebook often surpasses revenue and earnings estimates and is therefore likely to continue this trend in 2018.

Q4 2016: Consensus Estimate $1.11, Actual $1.24, Surprise 11.71%
Q1 2017: Consensus Estimate $0.88, Actual $1.04, Surprise 18.18%
Q2 2017: Consensus Estimate $1.13, Actual $1.32, Surprise 16.81%
Q3 2017: Consensus Estimate $1.28, Actual $1.59, Surprise 24.22%
Q4 2017: ? You fill in the blank.

Given that Facebook’s EPS will probably come in towards the top end of the analysts’ range in 2018, the company is likely to earn roughly $7.50 per share this year. At $7.50 a share Facebook’s P/E ratio goes down to below 24. This suggests the Facebook is likely cheaper than the average stock in the S&P 500, which has a P/E ratio of roughly 26.77. This is incredible considering the dominant market position the company enjoys and the robust growth rate it should continue to exhibit going forward.

In addition, Facebook has a pristine balance sheet, flushed with cash and nearly zero in debt. The extremely low short % of float suggests that smart money investors are not betting on Facebook’s stock to decrease in value any time soon.

Facebook: Technical Viewpoint

The uptrend is well intact, and we can see that FB recently made a new all-time high. The gap down from Friday looks destined to be filled in the next few days, after which Facebook’s march to new all-time highs should continue. The technical picture looks very sound as the stock is not overbought right now and there are no noticeable warning signs apparent. Moreover, this most recent sell-off is consistent with previous 5% drops that brought FB slightly below its 50-day moving average, after which the stock experienced strong buying interest. This trend appears very likely to repeat itself here.

FB 1-Year Chart
Source: stockcharts.com

FB 3-Year Chart

The Bottom Line: You Should Buy This Dip

Facebook is a dominant force in the social networking segment and in the online world in general. In fact, there are only a handful of companies that are destined to become trillion-dollar enterprises in the next few years and Facebook is likely one of them. The company’s enormous dominance in the social networking space, its relatively modest saturation rate, significant growth prospects, and reasonable valuation are all reasons investors are going to want to own this stock for years going forward. Moreover, the recent news feed adjustment is likely to boost business dynamics, not hurt them. Therefore, the stock is likely to get a substantial bid on this pullback, and Investors may not get a better opportunity to buy the dip.

Disclaimer: This article expresses solely my opinions, is produced for informational purposes only, and is not a recommendation to buy or sell any securities. Investing comes with risk to loss of principal. Please always conduct your own research and consider your investment decisions very carefully.

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Disclosure: I am/we are long FB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.