Facebook (NASDAQ:FB) stock has surged this year, climbing 33% year to date. This crushes the S&P 500‘s 19% gain over this same period.
Of course, there’s been good reason for investors’ growing bullishness for the stock. The social media company’s advertising business has seen incredible momentum and Facebook’s top-and bottom-line quarterly results keep easily beating analyst estimates.
But has the stock’s big move higher made it less attractive, to the point that investors shouldn’t be buying at this level?
Facebook stock downgraded to neutral
Arete analyst Rocco Strauss thinks the stock’s rise means upside potential is limited, particularly in the near term. Strauss downgraded his rating for the stock from Buy to Neutral on Monday, largely due to valuation. He kept the growth stock’s 12-month price target at $381, which represents just 5% upside from where shares are trading today.
With digital advertising set to face tougher comps in the second half of the year, he thinks shares are unlikely to rise meaningfully in the near term. Longer-term, however, the analyst remains optimistic about the stock’s potential thanks to the company’s efforts to monetize its “Reels,” or a TikTok-like social media sharing product, as well as its ongoing buildout of e-commerce solutions. But these initiatives won’t provide a meaningful boost until next year, he estimates.
Why this analyst could be underestimating Facebook stock
But there’s good reason to believe shares are still worth buying at these levels.
First of all, near-term expectations are somewhat low, relatively speaking. For instance, analysts expect revenue to only increase slightly between Q2 and Q3. Specifically, the consensus forecast calls for $29.5 billion, up from $29.1 billion in Q2. This 1% sequential increase would be much slower than the seasonality seen in 2019 (2020 is largely an irrelevant comparison because of COVID-19). Q3 2019 revenue increased 5% sequentially. If anything, it wouldn’t be surprising to see a strong sequential increase in Q3 2021 since it coincides with much of the economy still in a reopening phase.
Second, the company just has some extraordinary business momentum. Second-quarter revenue grew 56% year over year — and third-quarter revenue is expected to increase a slower-but-still-impressive 37% compared to the third quarter of 2020.
Finally, Facebook stock’s valuation is still very conservative. The company trades at 27 times earnings even though the consensus analyst forecast calls for earnings per share to increase at about 29% annually over the next five years.
Sure, there’s no telling what the stock will do in the near term. But this fast-growing, lucrative company’s stock certainly looks attractive based on its fundamentals and its valuation. While shares could easily trade sideways in the near term or even fall, it also wouldn’t be surprising to see the market bid up the stock until it trades at a higher premium — perhaps with a price-to-earnings ratio of 30-plus.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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