Facebook (NASDAQ:FB) dipped this month amidst legislative concerns, and better-than-expected fourth-quarter results have done little to push FB stock price higher.
Facebook’s earnings yet again negate the notion of stagnation in its user base. Additionally, I feel that many of its potential regulatory troubles are short-term in nature and should have little impact on its business.
Furthermore, Facebook stock is among the cheaper tech-stocks in the industry. The company has stellar financials with a trailing-twelve-month free cash flow margin of 18.6%. The stock is trading at just seven times its forward sales, strikingly low for a company with such an impressive FCF track record.
According to mean estimates, the stock is currently trading at a discount of more than 25% to its current price. Hence, with such strong numbers, Facebook stock is considerably undervalued, which further widens its bull case.
Impressive Q4 Results
Facebook capped off another solid year with results with yet again beat analyst expectations. Its revenues exceeded the $28 billion mark, growing 33.2% year-over-year. Earnings of $3.88 widened by a fair margin sequentially and also came in higher than expectations of $3.22 per share. Moreover, the company beat expectations across all its core metrics.
Revenue from monthly active users are almost at the $2.8 billion mark, registering 12% year-over-year growth. Users in the U.S. and Canadian market reached an all-time high of 258 million users. Daily active users in that market was off, though, which is mostly attributed to a slowdown in the pandemic-induced tailwinds. Nevertheless, the average revenue per user (ARPU) was at $10.1, comfortably ahead of estimates at $9.5.
Though the U.S. and Canadian markets generate higher ARPU, the Asia-Pacific region’s long-term role cannot be discounted. The Asia-Pacific market has 4.6 times the number of users than the U.S. and Canadian markets, presenting a massive long-term growth opportunity.
Even though its DAU numbers were ebbing, the company states that pandemic-induced tailwinds in e-commerce have greatly accelerated its advertising revenues during the year.
Advertising revenues for the full-year have grown by 21% year-over-year and 31% year-over-year for the fourth quarter. These trends are likely to moderate in 2021, as we get ever so close to a post-pandemic reality.
Additionally, Apple’s (NASDAQ:AAPL) recent privacy changes to its iOS 14 could impact the company’s ability to target ads. All in all, though, Facebook wrapped up the year in fine form, coming well ahead of expectations.
Impact of Facebook’s Legislative Challenges
The past few months have been tough for Facebook due to anti-trust lawsuits, political posturing and privacy scandals relating to WhatsApp.
In terms of political advertising, the company has been criticized for its apparent liberal bias, for circulating fake news, and for promoting certain agendas. However, in its most recent quarter, Facebook states that it will be limiting the amount of political content in user feeds.
Moreover, it also plans to stop recommending political groups to its users. Moderation of sensitive issues can dampen the polarization of its user base considerably.
The Federal Trade Commission filed an anti-trust lawsuit against the company for its monopolistic practices. The goal is to effectively break-up the company to reduce such issues.
However, its platforms’ interconnectivity and features are such that users will find it difficult to switch. A lot has been made about privacy online platforms in the past few months with the WhatsApp scandal and Apple’s recent update. I feel as though users are mostly unaware of the benefits of data-tracking.
Facebook is partly to blame for this, as it has failed to educate its users about the process and its benefits. With greater transparency and awareness about the process, I feel rational consumers will understand the pros of data collection outweigh its cons.
Final Word on Facebook Stock
Facebook stock has had a tumultuous few months, and neither of these is out of its ball-park. It continues to grow its top and bottom-line and has been a free cash flow machine for several years.
Despite this, the stock is undervalued and is wrongly beaten down by the negative investor sentiment. Therefore Facebook remains a fabulous long-term play in a highly competitive tech sector.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.