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3 Reasons to Buy Facebook, and 1 Reason to Sell

By Justin Pope – Sep 24, 2021 at 7:00AM

Key Points

  • Facebook went from Mark Zuckerberg's dorm room to a trillion-dollar social media conglomerate.
  • The company is highly profitable and is still growing at a substantial rate.
  • Regulators and politicians don't seem to like Facebook much, but the quality of its platforms is hard to ignore.

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Facebook is shrouded in controversy, but there are several reasons to invest in Mark Zuckerberg's empire.

Mark Zuckerberg and his social media company Facebook (META 0.62%) have come a long way from the origin story depicted in The Social Network, a fictionalized account of actual events that came out 11 years ago.

Evolving from a simple social media website, Facebook is now a conglomerate with a tight hold on billions of consumers' eyeballs. It's also gotten into its share of hot water over the years with regulators over its thirst for consumer data, shrouding the company in controversy.

That's what we see on the surface when it comes to this company (and its stock). But as we peel back the layers of the onion, there emerge at least three reasons to buy Facebook stock and one reason to sell it.

Person happily engaging with smartphone.

Image source: Getty Images.

Buy reason No. 1: Facebook is still growing (and evolving)

Facebook has become much more than the social network the company is named after. CEO and founder Zuckerberg has been somewhat sneaky with acquisitions over the years, acquiring Instagram for $1 billion in cash and stock in 2012 and the messenger app WhatsApp for $16 billion in stock and cash in 2014. Today, Instagram and WhatsApp have 1 billion and 2 billion users, respectively.

The trio of Facebook, Instagram, and WhatsApp have driven the company's user growth, from 2.4 billion monthly active users in the second quarter of 2019 to 2.9 billion in Q2 2021, a 20% increase. In other words, more than one-third of the global population now uses a Facebook-owned social media platform at least once a month.

Zuckerberg has made wise decisions in his acquisition of Instagram, correctly predicting that users would gravitate toward image-based content on social media platforms. He has again indicated a belief about the future of how we interact, focusing on the metaverse, where the internet and physical worlds overlap, as the next digital frontier.

Facebook owns Oculus, a company that makes augmented/virtual reality headsets. It recently put together a team dedicated to the metaverse and announced its first iteration of smart glasses via a partnership with Ray-Ban. It seems clear that Facebook is trying to expand the limits of its reach beyond the phones we hold in our hands.

Buy reason No. 2: Facebook makes a ton of money

Facebook's ability to make money from its users is impressive. In its most recent quarter, Q2 2021, the company generated $10.12 in revenue per user, a 43% increase from just a year prior. The company makes the vast majority of its revenue through advertising (about 98%), collecting a wide range of data from its users, then selling targeted ads to other brands based on that data. 

Its business is very profitable, converting 29% of its Q2 2021 revenue into free cash flow (FCF), amounting to $8.5 billion FCF on $29 billion in revenue. Facebook doesn't pay a dividend; it reinvests back into the business to drive growth while using excess cash to buy back shares to grow its per-share earnings.

Buy reason No. 3: Facebook's stock price is reasonable

Its market cap of $1.02 trillion makes it hard to call Facebook's stock "cheap," but its valuation could be reasonable. Facebook's expected full 2021 earnings per share of $10.09 puts the stock at a price-to-earnings (P/E) ratio of 35.

Analysts estimate that Facebook will grow its earnings by 22% per year for the next three to five years, so even if a P/E ratio of 35 isn't "cheap," the company could quickly grow into its valuation despite its large size.

A reason to sell: Government threats are unpredictable

Facebook's biggest problem is that it draws negative attention from regulators and politicians around the world for its invasive data policies, the occasional spread of misinformation on its platforms, and its role in how information spreads among the public.

The company was caught up in a scandal that broke in 2018 when a company called Cambridge Analytica harvested user data from millions of users without their consent in 2014-15 that was used to target voters in several 2016 elections. The Federal Trade Commission fined Facebook $5 billion for failing to protect its user data.

Facebook has brushed with the U.S. government on other instances, including allegations of anticompetitive practices, with some regulators calling for the company's breakup. The Federal Trade Commission launched another antitrust lawsuit in August. Facebook is getting larger, not smaller, so investors need to be aware that there is always an unpredictable risk of facing pressure from the government.

Does the good outweigh the bad for Facebook stock?

Despite the ongoing risks of government interference, Facebook is a great company that grows and generates a ton of cash for both the business and its investors. The metaverse addressable market could be worth as much as $280 billion by 2025, and Facebook is aggressively positioning itself to get its share. Success could mean years of continued growth for the company.

Meanwhile, despite its $1 trillion market cap, the stock is reasonably priced. Investors should monitor the company's ability to monetize its user base to indicate how Facebook's platforms are performing. The recent 43% year-over-year bump in revenue per user shows that Facebook could have a lot left in the tank.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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