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Facebook Earnings: FB Stock Should Be Owned, Not Traded

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Facebook, Inc. (FB) will report fourth quarter fiscal 2016 earnings results after the closing bell Wednesday. With almost 14% gains in the past thirty days and shares trading near all-time highs, FB stock has done exactly what I told you a month ago it would do.

The Menlo Park, Calif.-based social media giant is set to report fourth quarter fiscal 2016 earnings results after the closing bell Wednesday. The stock closed Tuesday at $130.32 and has already risen 13.27% year to date, crushing the 1.79% rise in the S&P 500 Index. In other words, despite allegations about fake news and worries about decelerating growth, Facebook is still a main attraction. So why bother trading the stock? Just own it.

As expected, with the more than 13% rise Facebook stock has enjoyed over the past month, this has boosted expectations for the just-ended quarter higher. It goes hand in hand. Since the end of the third quarter, EPS estimates have risen by 7 cents from $1.24 per share to $1.31. For that matter, the EPS has risen by a penny over the past thirty days. And just in the past seven days, estimates for the full year that ended December have been raised by 4 cents to $4.14 per share.

As it stands, Wall Street expects Facebook to deliver $1.31 in earnings for the three months that ended December, on revenues of $8.5 billion. This would translate to year-over-year growth of 66% and 46%, respectively. For the full year, earnings are projected to rise 81% year over year to $4.14 per share, while revenue of $27.34 billion would rise 52.5% year over year.

And here’s the thing: The projected earnings and revenue growth of 66% and 46%, respectively aside, even if Facebook were to beat those estimates, the stock could still fall. Why? Investors will demand justification for 14% stock gain, which only a “strong” beat can provide. And “strong” depends on your method of appraisal and what time frame you’re looking at.

So why go through the hassle trying to “outsmart” the market when Facebook CEO Mark Zuckerberg, who has outlined the company’s ten-year growth plan, continues to push all the right buttons? The endless focus of Facebook’s user growth — whether daily (DAU) or month (MAU) — from one quarter to the next is now a mistake. Those metrics mattered when Facebook was a startup, not when it is approaching a $400 billion market cap.

What’s more, with Facebook scaling up video advertising, which hints at efforts monetize Instagram, WhatsApp and Messenger, Facebook’s profits will continue to rise even as it ramps up spending to growth for the future. As such, with FB stock priced at just 25 times fiscal 2017 estimates of $5.20 per share, calling for 25% growth, Facebook stock seems discounted by 3 points. To that end, I’m adding a P/E of 28 to those estimates, which brings a fair value of around $150, regardless of what Wednesday’s earnings say.

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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