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Is Facebook A Buy Today In The Face Negative News Flow?

Mar. 03, 2021 2:44 PM ETMeta Platforms, Inc. (META)AMZN, GOOG, GOOGL, MSFT, TSLA144 Comments
Fishtown Capital profile picture
Fishtown Capital


  • Facebook released blockbuster Q4 results, but the stock moved in reverse on a mix of anti-trust, iOS 14/privacy, and regulatory concerns.
  • Facebook shares trade at a similar earnings multiple to the S&P 500 despite having far higher growth expectations.
  • Facebook is showing real operating leverage as SG&A and R&D continue to shrink as a percentage of revenue, leaving potential for upside in earnings estimates.
  • Facebook's privacy and anti-trust concerns are real but are likely fully reflected in the stock price by now.

Facebook (FB) has had a rough few months of negative headlines. From the December FTC anti-trust lawsuit, to iOS 14 changes requiring users to opt-in for FB to gather information, news licensing battles, even biometric privacy concerns, it doesn't seem a week goes by without a new negative headline.

I believe this negative sentiment has created a significant buying opportunity, where Facebook now trades at a Price/Earnings in-line with the S&P 500, despite having far higher expected growth. This has created an opportunity for patient, long term investors willing to tune out the near term noise.

Facebook's business is strong - especially Instagram - does its valuation make sense?

Facebook had an extremely strong year, growing operating earnings 36% on a 21% increase in revenue.

I believe next years earnings estimate of $11.12/share will prove conservative, even with the general premise that people will spend less time and money online and more time and money on activities, vacationing, and at restaurants. FB CFO David Wehner expressly guided to this recently.

But taking a longer term view, Facebook is currently expected to grow earnings at nearly 15% for the next 5 years, and I believe there is potential to grow faster than that. This is what investors should focus on, rather than the near term issues.

A Key Theme: Operating Leverage

Similar to arguments I made with both Google (GOOG) and Amazon (AMZN), I believe Facebook is reaching an inflection point in its business where both Capex and Operating expense growth will start to flatline, leading to a significant increase in operating income and free cash flow. We are already seeing this happen in the past 2 years.

Expenses are still increasing in absolute terms, but shrinking as a percentage revenues. R&D spend in 2020 was an eye-watering $18.5 billion, more than double the $7.7 billion

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This article was written by

Fishtown Capital profile picture
Individual investor and family office principal with over 20 years of investment experience. I favor fundamental analysis and look for individual issues and asset classes that are out of favor and represent a good risk/reward trade off. I often employ options strategies, covered calls on companies I own that have gotten ahead of themselves, and writing puts on stocks that I'd like to own at lower prices.Educational background Finance MBA (NYU Stern) with Computer Science undergraduate.

Analyst’s Disclosure: I am/we are long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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