Facebook (META -12.84%) seems to have been in the news for all the wrong reasons recently. Pessimism began in July when Facebook provided a bleak outlook for a sharp deceleration in revenue growth and narrowing operating margins during the rest of 2018 and into 2019. Then, in late September, Facebook discovered hackers had stolen some access tokens, which could have been used to take over accounts. Adding fuel to the fire last month, The New York Times ran a scathing article on Facebook's leadership, which the social network was quick to note included "a number of inaccuracies."
Once you add in a broader-market sell-off that hit tech stocks particularly hard beginning Oct. 1 and through most of November, it's no surprise that shares of Facebook have tumbled. The stock is down 34% since the company's second-quarter earnings release in July.
While it may take time for sentiment in the media toward Facebook to turn positive, the stock may not stay this low for long. Opportunistic investors willing to hold the stock as the company works through its current challenges may benefit from buying shares while they're trading so much lower than they were this summer. After all, the stock's lower price has essentially already priced in the slower growth investors are expecting.
Image source: Getty Images.
Here are three reasons Facebook stock is a buy below $145.
The company's network effect is a competitive advantage
First off, investors shouldn't overlook Facebook's powerful network effect. About 2.3 billion people now use Facebook every month and 1.5 billion use it every day. With so much of the world using Facebook, the sheer number of people on the platform is a competitive advantage in and of itself, giving the platform unprecedented scale and reach.
To really drive home how well the company has connected people around the world, Facebook started sharing a new key metric in the second quarter of 2018: the number of people using at least one of its apps -- Facebook, WhatsApp, Instagram, or Messenger -- each month. In Q2, this number was 2.5 billion. By Q3, this figure had already risen to over 2.6 billion. "We believe this is a better way to measure our community over time because so many people use more than one of our apps," said Facebook CEO Mark Zuckerberg in the company's third-quarter earnings call.
Even more staggering, Zuckerberg also noted in its Q3 call that over 2 billion people are now using at least one of the company's services every day.
No social network has come close to rivaling Facebook's user engagement levels. And the more Facebook grows, the stronger its network effect will be.
Growth is still robust
Sure, Facebook's revenue growth has decelerated rapidly recently. Third-quarter revenue was up 33% year over year -- down from 42% growth in Q2 and 49% growth in Q1. In addition, management said it expects its year-over-year revenue growth rate to decelerate by about 5 to 9 percentage points in Q4 versus Q3.
But management's guidance still implies robust year-over-year revenue growth in Q4 of about 24% to 28%. Given that Facebook is still growing rapidly (albeit not as rapidly as it was in previous quarters) and that management anticipates a meaningful operating margin of around 35% over the long haul, the company's current price-to-free cash flow ratio of 23 makes Facebook stock look attractive.
Zuckerberg & Co. know how to execute
Finally, investors shouldn't forget how well Zuckerberg and Facebook's management team have executed at critical junctures in the company's history, ultimately leading to significant value creation for shareholders.
Facebook CEO Mark Zuckerberg. Image source: Facebook.
For instance, when Facebook went public in 2012, the company hadn't even begun monetizing the mobile browsing experience. Yet within the next three years, mobile advertising revenue made up a whopping 73% of total advertising revenue, and the company proved that mobile ads were ultimately more important than desktop ads.
In addition, Facebook management has shown incredible foresight by acquiring photo-sharing app Instagram and messaging platform WhatsApp for sums that seemed wildly expensive at the time but have proven to be bargains in retrospect. Both of these social networks have grown significantly, with Instagram and WhatsApp now boasting over 1 billion and 1.5 billion monthly active users, respectively.
Some other key areas where management has executed very well are its aggressive investment in video, the quick rollout of the Stories format across its platforms, and a growing emphasis on building out its messaging services.
Facebook will likely continue to face very high-profile challenges. But the company's powerful network effect and its history of strong and timely execution suggest the social network will weather these storms and continue to create value for shareholders.
