The broader market has been in major rebound mode after the S&P 500 tested and held its 200-day moving average on Friday (2/9), a bullish sign for dip buyers that the worst is over. But one stock that has largely lagged in this rebound is digital ad giant Facebook (FB). Some of this lag has to do with fake news headwinds threatening digital ad demand, but those fears seem overdone considering Facebook is beating the drum of safety and security over profitability. Facebook is unparalleled in reach and scale in the digital world, so as long as the company invests in vetting extreme content (which management is planning on doing), then ad demand should remain robust.
The bigger part of Facebook’s struggles during this market rebound is an eMarketer report that Facebook is losing its cool among the youth audience. According to eMarketer, Facebook will lose roughly 2 million users under the age of 25 this year. That sounds awful, until you realize that similar headlines were making the rounds back in 2013. Since then, Facebook stock has increased seven-fold in value.
Clearly, there is a disconnect here. We believe that while it is true that Facebook’s popularity among the cool-oriented 25-and-under crowd has slowly eroded over the past 5 years, Facebook’s value as a multi-purpose internet utility has simultaneously grown over the past 5 years. Cool comes and goes. Utility stays forever. Therefore, the value-add of becoming a utility over the past 5 years has far more than offset the value-loss from becoming “uncool”. This trend will persist into the foreseeable future, and we believe FB stock remains one of the most compelling long-term investment opportunities in the market.
The reports of Facebook losing its cool date back to 2013. Back then, the narrative was that teens were opting for Snap (SNAP) instead. The same narrative continued in 2014, when people said FB’s penetration of the young adult market decreased as the demographic shifted to Snapchat. We heard the same story in 2015, through articles like this, this, and this. Then in 2016, famed short-seller Andrew Left of Citron Research targeted Facebook stock, saying that it was losing popularity to Snap and that market share losses implied that the company was worth nowhere near $330 billion. In 2017, Facebook reportedly lost 2.8 million users under the age of 25 while Snapchat grew its social media dominance among teens. Now, in 2018, Facebook is apparently set to lose another 2 million users under the age of 25 while Snapchat will add 1.9 million users in that same demographic.
But what has happened to the value of Facebook over this 5-year period? Facebook stock has soared more than 500% higher. Clearly, losing the “cool” factor isn’t all that important to Facebook’s value. Despite becoming less and less “cool” over the past 5 years, Facebook’s value has exploded higher.
This is because Facebook has made and continues to make the transition from trendy, teen-focused entertainment app to a multi-purpose internet utility catered towards all demographics. Facebook is no longer a place just for elite college students trying to connect with one another. It is now the town hall of the internet, where you can check the latest news stories (Trending), get reviews on services and see what is trending around you (Local), watch 15-minute original shows (Watch), buy and sell within a globally connected community (Marketplace), watch live videos (Facebook Live), and much more, in addition to checking in on friends and family. All in all, the increasingly multi-purpose nature of FB means that the platform doesn’t need to be “cool” to grow. It needs to be necessary, and through its multitude of offerings, Facebook is becoming increasingly necessary. That is why despite youth churn, total Facebook usage is still going up in the United States.
Consequently, even if Facebook did exist on its own, youth user churn wouldn’t be that big of a problem. But it is even less of a problem because Facebook owns Instagram, one the coolest apps out there, so any users Facebook is losing on its main app, the company is essentially gaining back on Instagram. It’s basically a wash. According to eMarketer, Facebook is set to lose 2 million users under 25 this year, while Instagram is set to gain 1.6 million users in that same demographic, so the net result is 0.4 million down. That is rather insignificant for a company with 2 billion-plus monthly users.
Brushing these largely unnecessary concerns of fading coolness to the side, we are looking at FB as a stock that is trading at less than 25x forward earnings for more than 25% long-term earnings growth estimates. That gives FB a PEG of 1. The market is trading at a PEG of 1.2. If you give FB that same PEG, you are looking at a 30x forward multiple and a $200-plus stock.
In the bigger picture, fading coolness for Facebook doesn’t really matter. Facebook the app continues to grow as a multi-purpose internet utility, while Facebook the company continues to grow both in utility and popularity thanks to Instagram. Overall, this is an incredibly cheap stock with an incredibly powerful growth narrative powered by secular growth in digital ads and a huge moat in the form of 2 billion-plus monthly users. We like that combination, so we are buyers here and lower, all else equal.
Disclosure: I am/we are long FB, SNAP.
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.