All things considered, Facebook's (FB) stock doesn't look too expensive following its post-earnings tumble.
However, those looking to buy on the dip should keep in mind that some cautious comments were aired on Facebook's earnings call about near-term growth, and that investor uncertainty about Facebook's 2020 performance could weigh on the stock until the air clears a little.
Facebook is down more than 6% after moderately topping Q4 estimates -- EPS would have beat more strongly if not for a $550 million legal settlement -- and forecasting on its call that its annual revenue growth rate (25% in Q4) will drop by a low-to-mid single-digit percentage in Q1. The guidance suggests that Q1 growth could be below a pre-earnings consensus of 23.4%.
As many others have pointed out following the Q4 call, Mark Zuckerberg's firm has often guided conservatively. In October, Facebook forecast its revenue growth would drop by a mid-to-high single-digit percentage in Q4. Ultimately, growth decelerated by 4 points (from 29% to 25%).
However, it's also worth noting that CFO Dave Wehner's earnings call remarks suggest that some of Facebook's recent growth headwinds will last beyond Q1. Specifically, Wehner said that "the majority of the impact" from three headwinds -- privacy regulations, reduced ad-targeting abilities (this impacts ad pricing) and the maturity of Facebook's business -- still lies in front of the company.
These comments differ a lot with what Wehner said on the Q3 call. Then, Wehner forecast that the deceleration in Facebook's annual growth rate would be "much less pronounced" in 2020 than it would be in Q4, since Facebook pressures related to ad-targeting headwinds and "the lapping of several successful [Q4 2018] product optimizations" were "largely unique to Q4."
When asked on yesterday's call about ongoing privacy and targeting headwinds, Wehner observed that regulatory efforts such as the EU's GDPR and California's CCPA are affecting how much data from third-party websites and services Facebook can leverage for targeting, as are current and upcoming privacy features that Apple (AAPL) and Alphabet/Google (GOOGL) are adding to their respective mobile operating systems and web browsers. He also noted that Facebook's own rollout of new privacy controls are affecting data collection.
(As an aside, some of these privacy and targeting headwinds could also be a problem for Twitter's (TWTR) ad business, which is already dealing with execution issues. Google, meanwhile, is less exposed, since much of its ad targeting relies either on search keywords or Google's own data.)
Needless to say, having less access to data about what consumers are doing on third-party websites and apps isn't good for Facebook. But at the same time, this is less of a long-term problem for Facebook than it is for many other online ad players, since the company also has a ton of first-party data -- everything from profile information, to followed Facebook pages and Instagram accounts, to data about which ads, articles and videos a user has engaged with -- about most of the nearly 2.3 billion people who use one its main services on a daily basis.
Over time, it's likely that Facebook will get better at offsetting the loss of some of the third-party data it has had access to by improving its ability to deliver targeted ads using first-party data. The company's burgeoning e-commerce efforts should help its cause here, by leading more e-commerce activity to happen on Facebook's platforms and thus providing Facebook with more first-party shopping data.
In addition, Facebook, whose ad impressions rose 31% annually in seasonally big Q4, still has a decent amount of headroom to grow ad sales on Instagram in general, and on Instagram Stories in particular. And though one can argue that the company is moving too cautiously here, there's still quite a lot of untapped long-term potential to monetize WhatsApp and Facebook Messenger.
Facebook currently trades for 19 times a 2021 EPS consensus of $10.92, and has an enterprise value (market cap minus net cash) equal to 20 times a 2021 free cash flow consensus of $27.5 billion. Between the moats surrounding Facebook's platforms and ad business, various growth opportunities the company has in front of it and the fact that its near-term profits and cash flows are pressured by big data center and content safety investments, that valuation doesn't look bad.
This valuation doesn't by any means guarantee that Facebook won't fall further in the coming weeks as Wall Street weighs its cautious near-term outlook. But it does arguably yield some margin of safety, at least provided that markets in general don't witness a major selloff.
