Although shares of Facebook (META -0.17%) have advanced nearly 33% year to date, some analysts are concerned about its prospects. The stock's rise has leveled off after the company's second-quarter results in late July, as investors were concerned about a small decline in daily active users in the U.S. and Canada, as well as revenue guidance.
That said, the company exceeded analyst expectations by reporting a year-over-year revenue increase of 56% and a rise in earnings per share (EPS) of 101%. Both were higher than consensus estimates.
While there are a few concerned analysts, don't count Credit Suisse's Stephen Ju among them. Following the quarterly report, he raised his firm's per-share price target on Facebook to $500 from $480 and maintained the outperform rating. It's now the highest price target among Wall Street analysts.
Can Facebook get there?
Although most analyst price targets are for 12-18 months, there are a few metrics from a valuation standpoint that suggest Facebook should be worth $500 per share now. Most notably, this happens when comparing Facebook to smaller peers like Twitter and Snap that trade at forward price-to-earnings (P/E) ratios of 70 times and 270 times, respectively. Facebook's forward P/E is 28.5.
Admittedly, both companies posted faster growth rates than Facebook's 56% top-line increase last quarter -- Twitter at 74% and Snap at 116% -- but it would only take a 40% valuation increase, the equivalent to 40 times forward earnings for Facebook, to be a $500 stock.
The broader market comparison seems supportive, as well, when growth is factored in. Facebook trades at 27 times trailing earnings, versus the S&P 500's multiple of 31 times, despite the S&P 500 posting negative sales growth over the prior year (versus Facebook's 56% increase noted earlier), according to Standard & Poor's.
Finally, there's another way for Facebook to make it easier to attain a $500 per-share price -- stock buybacks. Lowering the total number of shares increases the earnings per share and raises per-share prices, all other factors remaining equal. Earlier this year, the company boosted its buyback coffers, adding $25 billion (currently worth 2.5% of total shares) to its existing $8 billion authorization.
Short-term risks, long-term opportunities
There are certainly risks in Facebook stock. It's been the rare company to draw bipartisan ire at both the federal and state levels. A recent lawsuit from 48 states, in addition to the Federal Trade Commission, alleging illegal monopolization was recently dismissed.
The state attorneys general noted they will fight the decision. While the rhetoric is red hot, it's likely that any risk is short-term and of low impact to Facebook's core business.
However, Zuckerberg is working on something new, and it could be the company's biggest opportunity yet. In the most recent earnings, the CEO stated his desire to turn Facebook into a "metaverse company" within five years. The company has high hopes in the VR-inspired experience it expects to replace the mobile internet.
Despite Zuckerberg's exuberance, investors should consider any revenue attributable to the metaverse as a cherry on top of a strong core social media business. It's this optionality that makes the company a smart investment.
Facebook at $500 doesn't seem far-fetched, and long-term investors are likely to see shares eclipse this total -- perhaps even sooner than in 18 months.