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Cash Will Keep Facebook Inc Stock in a Growth Mode

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Facebook Inc (NASDAQ: FB ) stock has hit a plateau. Uncertainty regarding the end of net neutrality, changes to its advertising platform, and alleged involvement in an election probe have caused FB stock growth to pause. Still, with profit growth expected to remain around 20% per year, the controversies have created a great opportunity to buy FB stock.

Facebook Stock Growth Paused

To be sure, 2018 has started off poorly for Facebook. I said at the beginning of the year that the end of net neutrality would probably hurt FB stock in the near term. So far, it appears other issues have superseded neutrality. News from CEO Mark Zuckerburg that the site would prioritize posts from friends and family over sponsored content further hit the stock.

Also, the company's alleged involvement in the controversy over Russia influencing the 2016 presidential election has also put off investors. So far this year, FB stock trades at about the same price where it opened at the start of the year.

User growth may also be close to hitting a plateau. Facebook now boasts having nearly 2.2 billion monthly active users (MAUs). The world's population stands at 7.6 billion. When factoring out those who either cannot or will not use the internet, this figure implies limited room for user growth. Hence, regarding the main platform, most of the revenue growth has to come from advertising.

Facebook Stock on Path for Growth

The good news for long-term FB stock investors lies in the long term. Their platform remains the dominant general social media platform. YouTube, operated by Alphabet Inc (NASDAQ: GOOGL , NASDAQ: GOOG ), comes in a distant second in MAUs. Facebook attracts more than six times the number of monthly users as Twitter Inc (NYSE: TWTR ). Also, it seems that Snap Inc (NYSE: SNAP ) cannot develop a Snapchat feature that Facebook cannot take away.

Even FB-owned platforms such as Facebook Messenger and Instagram attract more MAUs than the main platforms of most other social media firms. So while Facebook itself may have hit a saturation point, the company's other platforms have more room for growth.

Strong Cash Position Key to Facebook Stock

Also, one cannot count out a company with close to $42 billion in cash on its balance sheet. Older tech peers such as Microsoft Corporation (NASDAQ: MSFT ) and Intel Corporation (NASDAQ: INTC ) used their cash hoard to diversify into other business lines when their original cash cows fell out of favor.

The $2 billion bet on Oculus and virtual reality did not pay off. However, buying WhatsApp and Instagram gave Facebook the third and seventh most widely-used social media platforms respectively. Hence, if the Facebook site stops producing growth, the company will buy or create a platform that will. Facebook stock will grow with it.

Another possible cash investment that would help FB stock involves an investment in its shareholders.

They could take a page from older tech companies such as Microsoft and Apple Inc. (NASDAQ: AAPL ) and pay dividends. Tech companies tend to focus less on dividends. Still, companies such as Microsoft and Apple increase dividends in most years and pay dividends that slightly exceed the S&P 500 . Profit growth will remain the largest growth incentive for years to come. Still, as growth slows down, dividends give conservative and income-oriented investors a reason to look at Facebook stock.

Moreover, a dividend at current valuations would likely make FB stock too cheap to resist. Facebook trades at a current price-to-earnings (PE) ratio of 33. Its forward PE stands at 25. The 50% current annual growth rate will fall closer to 20% in future years. At these figures, I believe the market has slightly undervalued the company. So Facebook remains a long-term buy with or without a dividend.

Bottom Line on Facebook Stock

Although 2018 started off slow for FB stock, future growth remains on track to make the equity a great long-term buy. Issues such as net neutrality, ad-related changes and election interference weigh on the stock. However, profit growth should exceed 20% per year, despite signs of saturation for the main Facebook site.

Also, its large cash position should allow for the creation or purchase of new business lines if growth slows. Paying some of that cash in dividends could also help Facebook stock. Although nobody knows when the equity will move higher again, the elements remain in place for Facebook to continue its long-term growth story.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.

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The post Cash Will Keep Facebook Inc Stock in a Growth Mode appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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