3 Reasons to Be Bullish on Facebook Stock

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Not long ago, Facebook (NASDAQ:FB) bulls thought FB stock was a no-brainer. But of course, during the past few months, the shares have dropped sharply, with the Facebook stock price plunging from its 52-week high of $218 to $142.

One of Facebook’s major issues is the uncertainty regarding the actions the company will take to safeguard its users’ privacy. Earlier in the year, Facebook’s relationship with Cambridge Analytica, which exposed the user data of millions, was disclosed. But unfortunately, other negative stories about Facebook’s lax privacy policies surfaced, showing that the company had not put enough effort into safeguarding its users’ privacy.

Meanwhile, there was considerable turnover among Facebook’s executives, as the founders of WhatsApp and Instagram abruptly departed. There’s even buzz that COO Sheryl Sandberg may leave as well!

So what now? Where does FB go from here? Well, I actually think the company needs to hire new executives who are more adept at developing effective policies. That should achieve the company’s goal of cleaning up its platforms and implementing better security measures.

But all these problems are fixable, and FB has the resources to put the right systems in place.

In other words, given the latest selloff, I think FB stock provides investors with an interesting opportunity. Let’s take a look at three reasons for my belief:

FB Stock Advantage #1: Diverse and Massive Platforms

Even with its massive scale and its privacy scandals, Facebook’s user base continues to grow. In the third quarter, the website’s MAUs (Monthly Active Users) rose by 10% to 2.27 billion and its DAUs (Daily Active Users) increased 9% to 1.49 billion.

Unlike Snap (NYSE:SNAP) and Twitter (NYSE:TWTR), FB has more than one huge asset; in addition to the Facebook website, FB also owns WhatsApp, Messenger and Instagram. All three have the advantages of network effects, which means that they get more valuable as more users join them. As a result, it’s extremely difficult for Facebook’s rivals to get traction.

Keep in mind that WhatsApp, Messenger and Instagram are still in the early stages of being monetized. Consequently, they will be attractive growth drivers in coming years.

FB Stock Advantage #2: Powerful, Continuous Trends

While the online advertising market has been around for more than two decades, it continues to grow at a robust pace. According to research firm IDC, spending on digital ads is expected to go from $229 billion in 2017 to $360 billion by 2021, which is a compound annual growth rate of nearly 11%.

And the strong growth outlook of digital advertising should not be surprising. Advertisers want to be where consumers are, and consumers are spending much of their time on digital platforms. Advertisers also want scale and access to demographic information that will allow them to launch more successful campaigns.

Given all this, FB is a must-have. The company is simply too important to ignore. Because of that, it seems like a good bet that FB will continue to get an out-sized share of the digital ad opportunity.

FB Stock Advantage #3: Valuation

The valuation of FB stock is certainly getting compelling. Note that the forward price-earnings multiple of FB is about 18.5.

That’s actually a lower valuation than other mega-tech operators. For example, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) forward multiple is 23 and Microsoft (NASDAQ:MSFT) has a forward multiple of 22. Yet FB is growing at a much faster pace than GOOGL and MSFT.

What’s more, Facebook continues to generate substantial cash flows as its margins remain fairly high. Keep in mind that it has $41.21 billion of cash in the bank.

And finally, the Street’s sentiment towards FB stock has really reached awful levels. Facebook stock price reflects a large amount of despair about the company.

But taking a contrarian approach seems like a good strategy right now because there are several major levers that FB can pull to generate growth,  and it probably feels a much greater sense of urgency about pulling them after Facebook stock price tumbled.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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