Update: Facebook's Valuation

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 |  About: Facebook (FB)
by: David Zanoni

Summary

Facebook is still priced well in terms of its future growth.

There are still many skeptics out there who don’t see the opportunity.

I expect the stock to significantly outperform the market.

Although Facebook's (NASDAQ:FB) valuation rose after beating its revenue and earnings expectations this week, my analysis shows that the stock is still fairly valued and poised for future market-beating gains. In my last article on the company, I pointed out that Facebook was fairly valued in terms of its PEG ratio and on a discounted cash flow basis. The Q2 earnings report confirms my thesis that the stock will continue to run higher on growth. Since Facebook's growth exceeds its forward PE, there is still plenty of room for the stock to run higher as future earnings reports come in positive. This quarterly report and the subsequent stock rise was a great example of how the stock will run higher going forward. The stock's strong performance is a result of the company growing revenue and earnings at an above average pace while the valuation remains fair with a PEG of 1.4. This remains slightly lower than the Internet Information Providers industry's PEG of 1.7. The industry's expected 5-year annual earnings growth averages about 23%, while Facebook is expected to grow earnings at an average of about 35% annually over the same period.

There are still many skeptics out there who fail to see the opportunity with Facebook. These skeptics are evident here on SA in the comments section of FB articles. One of the most intriguing statistics that Mark Zuckerberg mentioned in the Q2 conference call was that U.S. Facebook users spend about 40 minutes a day using the service. This demonstrates a strong case for the use of advertising on Facebook and it should quiet many of the skeptics. With over 1.3 billion users and 829 million daily active users worldwide on Facebook, companies have an abundance of consumers to advertise to. Think about this: companies spent about $4 million each for 30 second Superbowl ads to advertise to over 111 million people. Facebook has 829 million active users on its service every day! It just makes sense for advertisers to use Facebook to get their messages out to a wide audience. With ads targeted to users based on their interests, the Facebook format is likely to continue to be highly effective going forward.

Analysts are expecting revenue to grow 51% this year to $11.9 billion and 32% next year to $15.8 billion. Earnings are expected to increase by over 60% this year and by over 27% next year. The company has proven itself in profiting from its growing base of active users and it has just begun. New concepts such as the Buy button being tested to accept payments without leaving the Facebook site shows that the company is continuously looking to find new ways for its advertisers to be successful. Such new concepts are likely to entice new advertisers to the site. With Facebook's valuation still fair in terms of growth, the stock should continue to significantly outpace the market as revenue and earnings grow at an above average pace.

Disclosure: The author is long FB. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.