Facebook (NASDAQ:FB) recently surprised investors by announcing a hefty share repurchase program.
In this clip from Industry Focus: Tech, Motley Fool analyst Dylan Lewis and Fool contributor Daniel Sparks explain what the company's comparatively low valuation has to do with the move, and why investors might want to take this opportunity to buy into a solid company.
A full transcript follows the video.
This podcast was recorded on Dec. 2, 2016.
Dylan Lewis: I will say, for Facebook investors, this might be a pretty solid time for them to be able to opportunistically buy shares. I know the authorization doesn't really allow them to start acting on this for a while. But you look at how they've been over the last month or so, for a company that's been a market darling for a long time, it seems like Facebook has fallen on some hard times.
Daniel Sparks: Yeah. I think that brings up why I can understand that they're actually doing this. Not only do they have the cash flow, but the timing does look good. Sure, Facebook has a P/E (price to earnings) ratio of 44X, but when you look at their forward P/E ratio, and their earnings are estimated to grow next year, that P/E ratio could get into the 20s, which, for a company growing as fast as Facebook, that's actually a pretty low P/E ratio. Then, you factor in what you might think of Facebook's competitive advantage, which, in my personal opinion, I think network effects are one of the most powerful ones, especially given Facebook's huge network effect. They have over 1 billion daily active users. I just think this is a good time for Facebook to be buying back their own stock.
Lewis: Yeah, you talked about them being at 44X as a trailing P/E right now. You go back a year, they were double that. That's not to say the company hasn't performed and the stock hasn't performed well. They are certainly up year to date over the last 12 months. I think it's just a testament to the fact that valuations creep down a little bit as the business has continued to perform, and those bottom-line numbers look pretty good for them. So, could be a good opportunity for them. And certainly, at the scale they're doing it, it won't be something that's massively disruptive, because they're in such a great financial position.