Last week, Facebook (NASDAQ:FB) showed investors that just because it’s already one of the biggest tech companies in the world doesn’t mean it can’t put up impressive revenue growth numbers. The company’s 48% top-line growth rate absolutely obliterated analysts’ expectations.
While Facebook shareholders were likely pleased with the stock’s big move higher following its earnings report, the growth stock’s 8% gain last week means that investors buying the stock now have to pay a greater premium to own shares of this high-quality company. Is the stock worth its higher price tag? Even more, could shares still be a compelling opportunity at this level?
It may not be too late to buy Facebook stock
As it turns out, Facebook stock’s post-earnings valuation isn’t too expensive. Sure, the company currently trades at just 27 times analysts’ average forecast for its earnings per share in 2022 and 32 times estimates for this year’s earnings per share. While this may sound expensive on the surface, it’s not bad when investors put this valuation in the context of Facebook’s growth. In the company’s first quarter of 2021, advertising revenue surged 46% year over year and total revenue rose 48% year over year. Further, net income nearly doubled.
To be fair, Facebook benefited from an easy year-ago comparison, when first-quarter 2020 revenue grew only 18%. But even if investors circle back to growth rates when things were more normal, Facebook was growing rapidly. Fourth-quarter 2019 revenue, for instance, rose 25% year over year. For the full year of 2019, revenue grew 27%.
Additionally, investors should note that Facebook’s operating margin has been expanding in recent years, rising from 34% in 2019 to 38% in 2020. Longer-term, Facebook’s operating margin could reach levels around 45%, where it was before the social network started ramping up spending on privacy initiatives and was charged a record-breaking fine by the Federal Trade Commission in 2019. Indeed, Facebook’s operating margin approached this level in its first quarter of 2021, hitting 43%. Over time, Facebook’s spending on privacy can still remain robust yet shrink as a proportion of revenue. Further, the company has been taking a more proactive stance to do what it takes to comply with global regulators regarding privacy and user data; any potential future fines, therefore, could be a smaller proportion of total revenue since Facebook is actively trying to appease these regulatory bodies.
Worth its premium
Overall, the stock seems to easily justify its valuation. For investors willing to buy and hold shares for the long haul, there’s likely still more meaningful upside ahead.
Of course, investors who buy shares of the tech company today should plan for plenty of volatility since growth stocks like Facebook have historically been very volatile. But Facebook stock’s long-term prospects remain promising.
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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