Last week, Facebook (NASDAQ: FB) showed investors that just because it is already one of the largest tech companies in the world does not mean that it cannot show impressive earnings growth. The company’s revenue growth rate by 48% completely exceeded analysts’ expectations.
While Facebook shareholders were probably happy with the big rally in the stock following the income statement, the 8% rally in the stock last week means that investors buying shares now have to pay a large premium to their own shares in this high-quality company. Is this promotion worth the higher price? Moreover, can stocks remain an attractive opportunity at this level?
It may not be too late to buy Facebook stock
As it turns out, Facebook’s post-profit valuation is not very high. Of course, the company is currently trading just 27 times the average analyst forecast for its earnings per share in 2022 and 32 times the earnings per share estimates for this year. While it might sound expensive at first glance, it’s not a bad thing for investors to put this valuation in the context of Facebook’s growth. In the first quarter of 2021, ad revenue grew 46% year over year, while total revenue grew 48% year over year. In addition, net income has almost doubled.
In all fairness, Facebook benefited from a simple comparison a year ago, when revenue in the first quarter of 2020 grew by just 18%. But even if investors return to the pace of growth when things were more normal, Facebook grew rapidly. For example, Q4 2019 revenue was up 25% year-over-year. For the full year of 2019, revenue grew by 27%.
In addition, investors should note that Facebook’s operating margin has increased in recent years from 34% in 2019 to 38% in 2020. In the long term, Facebook’s operating margin could reach around 45% where it was before the launch of the social network. increased spending on privacy initiatives, and the FTC imposed a record fine on him in 2019. Indeed, Facebook’s operating margin approached that level in the first quarter of 2021, reaching 43%. Over time, Facebook’s privacy spending may remain significant, but its share of revenue will decline. In addition, the company has taken a more proactive stance to do its best to comply with the requirements of international regulators regarding privacy and user data; therefore, any potential future fines could represent a smaller share of total revenue as Facebook actively tries to appease these regulators.
Worth its prize
Overall, the stock seems to be doing well for its valuation. For investors looking to buy and hold stocks for a long time, there is probably even more significant upside potential ahead.
Of course, investors who buy tech stocks today should be targeting more volatility, as growth stocks like Facebook have historically been very volatile. But the long-term outlook for Facebook’s stock remains promising.
This article represents the opinion of an author who may disagree with the “official” position of the Motley Fool premium advisory service. We are colorful! Bidding on an investment thesis – even our own – helps us all to be critical about investing and make decisions that help us become smarter, happier, and richer.