Facebook (FB) Stock: Why the Pessimistic Pundits Are Wrong

With an amazing boost in revenues (~56% yoy), the future looks bright for this bargain.

Facebook stock

Facebook is poised to rise up to $153 over the next year, amounting to a 20% increase from its current price. Investors are eyeing the load of advertisements concerning Facebook as a main reason for its excellent increase in earnings. However, after this upside, valuations are shedding light on the future deceleration of revenue growth despite the companies’ effort to innovate its relatively new apps like Instagram, Messenger, and WhatsApp, which are still catering mostly to young audiences.

It looks like Facebook Inc (NASDAQ:FB) stock is headed for a bull run due to an impressive increase in its earnings for the first half of this year. The social networking giant boasted a 56% year over year (yoy) growth in its revenue, from its previous 40% first half earnings last year.

Bears were expecting the growth of the company to decelerate, however they were proven wrong with the first half-earnings per share (eps) growing more than twice, reaching an impressive 89%. The tech giant also beat earnings estimates for the first two quarters of 2016, with an average of 22%, a huge surprise from the 5% gap in the same two quarters last year.

With a P/E ratio of 83.16 for the previous year, Facebook is now valued at a P/E ratio of 59.19, while analysts have a bullish estimate that it will end the year with a 39.46 P/E ratio. Earnings estimate concerning the tech giant are gapping up and analysts view that Facebook is rapidly growing into its valuation.

That said however, and even with Wall Street’s bullish sentiments for the company, the reality is Facebook still has expenses under its belt, including the name’s estimated $1.25 a share payment (amounting to a quarter of adjusted profits) for stock based compensations to its workers. Nevertheless, the Menlo Park, California-based firm appears as a bargain for most with respect to its yield, predictability and explosive revenue increase. Furthermore, the name holds true to investor expectations as it outpaces its expenses through efficient profit-taking.

The massive increase in Facebook’s revenues may be attributed to a strong growth of the number of ads the company can cater to its users. However, the social site knows that the key to maintaining its lead, lies with the steady increase and moderation of its ads over the next year. And this obviously crucial for the company if it wants to avoid detrimental effects to its earnings.

Furthermore, in order to avoid overexposure of its users to advertisements on its namesake app, the number of ads that Facebook can churn out may still make its way to Instagram, Messenger, and WhatsApp, which are still light on load.  Wall Street expects that about 1.1 billion current daily average users will reach 1.7 billion in 4 years. With this, Facebook is surmised to evolve its current ad practices into more suitable forms of transactions beneficial for the growth of the company.

However, even with its current rising growth, valuations for the company are expecting a slowdown in its current revenue growth pace for the coming years. Analyst consensus shows that Facebook’s revenue will make its way up to 51% this year (about $27 billion), followed by 35% increase next year, 28% for 2018, with a continued deceleration in its growth for the following years.

Nevertheless, the company, which is trading at $124 and change a share on Monday morning, according to a Barron’s report on Sunday, is expected to have its stock price soar to $153 over the next year, with its revenue continuing to be backed up by more efficient means of churning out advertisements for the future.

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