Facebook Q4 earnings: is FB really worth $150?

Facebook (FB) report Q4 earnings on 2nd February and the investment community will be keen for confirmation that some of the recent concerns are overblown. Despite a good rally since late December, I believe current levels still pose an attractive entry point.

Most analysts see Facebook as a stand-out in the tech space, but will the outlook justify some very positive expectations?

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Source: Bloomberg

Facebook looks cheap on a number of valuation metrics, with consensus earnings forecasts being revised up over the past two months. Considering the market expects a 27% year-on-year increase in earnings-per-share (EPS) for 2017 and a 37% YoY increase in revenue, the fact they trade at 24 times 12-months earnings is attractive. This is especially true relative to the internet space, which trades at 30 times prospective earnings.

We can look at the price/earnings-to-growth ratio (PEG) at a very compelling 0.7 times, which suggests this is a growth stock at current levels and, if the outlook for the ad market is upbeat, one the value investors will be very happy to accumulate.

FB did disappoint investors in its Q3 earnings in November, promoting some concern that ad revenues may be softer than forecast this year, while a strong increase in operational costs could impact margins. We should remember that expectations were sky high then and there are few stocks with such an outstanding pedigree at earnings time. Facebook has beaten EPS estimates for eight consecutive quarters and seven of the last eight on sales.

In terms of the Q4 estimates, the consensus belief is we should see EPS of $1.30 (+65% QoQ) on revenue of $8.49 billion. Gross margins are expected to be an undeniably healthy 87%. As mentioned, the market will also be keying off any outlook that marries to the 2017 full-year estimates of $5.23.

Much focus will be on cost growth, but user growth, time spent on both the platform and video, plus advertiser demand, could offset cost concerns and play into the view that revenue growth is still likely to be strong.

Recent engagement surveys have shown that 46% of teens plan to increase their time spent on FB in 2017, relative to just 7% who plan to spend less time on the platform. This, of course, is encouraging for advertisers.

One other area worth focusing on is Instagram, as the future value in this product doesn’t seem fully realised. With 600 million active users and a growing and loyal advertiser base, this is a growth area for FB and one that could push the stock higher.

The consensus price target from sell-side analysts is $153.15, and although investing in a stock purely because it is trading at a discount to a consensus target is usually a terrible idea, I do feel that concerns about weaker revenue growth and a rise in costs potentially affecting margins are largely overdone.

I therefore believe a test of the October highs of $133.84 is achievable and a break here absolutely sets the stock up for a run into $150 and even further. Interestingly, the weekly chart shows a reluctance to close through the 60-week moving average. A close through this average and specifically $114.00 would suggest the investment is a poor one and it is time to close out.

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