Introduction:
Facebook (FB) is on tap to report Q4 FY2017 earnings along with its full-year FY2017 numbers. Facebook recently breached the $189 level as earnings approach however recently sold off from these highs following news that Facebook would overhaul its news feed in favor of “meaningful social interactions” verses “relevant content”. I think this news was timely with the upcoming earnings announcement as Facebook will once again deliver phenomenal growth numbers across the business with beats on both top and bottom lines. Once the growth trajectory is affirmed with EPS moving in lock-step, the stock only becomes cheaper and thus this pull-back could be a rare buying opportunity prior to the stock breaking through the $200 barrier.
Facebook ended 2017 with a monster return of 53% however considering its growth the stock remains relatively cheap with a P/E of 34.8 and PEG of 1.23 implying an annual EPS growth rate of 28.3%. Once the newly designed news feed launches in conjunction with earnings later this month, I think the stock could break through the $200 level imminently. I feel that Facebook represents value even after this massive run through 2017 and I maintain my long thesis with a price target of $230 by the end of 2018.
News Feed Overhaul:
Facebook announced major changes are coming to its news feed to prioritize “meaningful social interactions” on the social media’s news feed as opposed “relevant content”. With this reformatting, users will start seeing less public content from businesses or publishers and more posts from their friends. Mark Zuckerburg expects that the time people spend on the social media network will decrease as a result however it will be “more valuable”. Facebook sold-off on the news as investors and analysts regarded this as an overall negative impact to earnings. Facebook sold-off over 5% on the news or $10 per share as analysts weighed-in on the new roll-out. Overwhelmingly, analysts still remain positive on shares of Facebook with JP Morgan’s Doug Anmuth maintaining his overweight rating and a $230 target price. I feel that the news feed overhaul will be negligible to earnings, especially over the long term. This sell-off is a great opportunity to enter the stock prior to what will likely be a fantastic earnings announcement.
