Facebook Inc (Nasdaq: FB) traditionally has been considered much more of a growth investment than a value investment. But Facebook’s exceptional growth coupled with its underperformance so far in 2018 has gotten the attention of value investors.
In a new report, Bank of America analyst Justin Post uses a sum-of-the-parts valuation for Facebook and concludes that the stock is valued closer to traditional media companies than other high-growth tech stocks.
“Backing out estimated values for Instagram, messaging apps and cash, the potential 2019 earnings contribution from Instagram, and $1 billion [in] costs for video and Oculus investments, we estimate core FB is trading at 12 times 2019 estimates earnings,” Post says.
Post says that a 2019 earnings multiple of about 12 even represents a slight discount to the 2019 overall earnings multiple of big media stocks.
[See: 6 Things to Know About Mark Zuckerberg’s Manifesto.]
The Technology Select Sector SPDR ETF ( XLK) is up 5.4 percent and high-growth FANG peers Amazon.com ( AMZN) and Netflix ( NFLX) are up 28 percent and 57 percent respectively so far in 2018. By comparison, Facebook stock is up just 0.5 percent year-to-date despite reporting exceptional 47 percent revenue growth in the most recent quarter.
Post says three areas of uncertainty are weighing on Facebook stock. First, investors are skeptical that Facebook will be able to maintain its growth numbers long term. Second, investors are worried about rising expenses related to streaming video and other heavy-investment initiatives. Lastly, investors are concerned about a regulatory crackdown on social media content.
Facebook and other social media companies have been under intense scrutiny after special counsel Robert Mueller recently indicted 13 Russian nationals and accused them of using a “troll farm” of fake social media accounts to spread propaganda to influence the 2016 U.S. presidential election. Earlier this year, Facebook CEO Mark Zuckerberg said he is committed to fixing Facebook in 2018 and announced changes to Facebook’s News Feed that will reduce content from publishers and advertisers and may result in users spending less time on the platform.
While a potential crackdown could hurt Facebook’s ad dollars, Post says there is simply too much value to ignore.
“Increasing investments and negative usage/regulatory news cycles have impacted sector sentiment, but we think core stock valuations are not reflecting growth that far exceeds other consumer discretionary sectors,” Post says.
[See: 7 of the Best Stocks to Buy for 2018.]
Bank of America has a “buy” rating and $265 price target for FB stock.
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Facebook Is an Under-the-Radar Value Play originally appeared on usnews.com
