Facebook (Nasdaq: FB) released its second-quarter earnings report on July 27, and the company reported a very good quarter. Does that mean you should rush out to buy the stock? Here’s what you need to know.
Facebook by the Numbers
Sales in the second quarter were $29.1 billion, a whopping 56% higher than sales in the same quarter last year. This generated $10.4 billion in profit for the social media giant.
Earnings were $3.61 per share compared to analysts’ expectation of $3.03 per share, CNBC reported. Second-quarter revenue was higher than the $27.89 billion analysts expected.
Facebook reported an increase of 7% in daily active users in June, to 1.91 billion. The company said that the number of monthly active users was also up by 7% over June 2020, to 2.90 billion.
The average price of an ad on Facebook rose 47% in the quarter, and the number of ads sold by the social media behemoth increased 6% over the previous quarter.
An Earnings Beat Doesn’t Always Signal an Increase in the Stock Price
Both revenue and earnings per share were higher than analysts expected. But the stock price fell in trading after the stellar earnings announcement. And it wasn’t just a little dip — shares were down by nearly 5% at one point after hours.
Why?
The answer to this question may be easier than it seems. While investors don’t have a crystal ball, they still base their trading decisions on what is likely to happen in the future, not what has happened in the past. And the future looks a little murky for Facebook.
Even the company said that advertising growth could slow in the third quarter. Changes to Apple’s iOS operating system will make it harder for Facebook and other social media companies to target their ads to consumers, who can now opt out of having advertisers follow their every move online in order to serve up ads related to searches they’ve performed and sites they’ve visited.
There’s also the uncertainty of Washington’s concern over the misinformation that spreads unchecked on Facebook and other social media platforms. In March, Mark Zuckerberg was called to testify before Congress, along with some of his fellow tech CEOs, about what the platform is doing to ensure that erroneous information about COVID-19 and other topics isn’t shared as though it were fact.
The market doesn’t like uncertainty, and there is a fair amount of uncertainty right now around whether or not Congress will act to encourage — or even require — companies like Facebook to take steps to curb the misinformation that is being posted on their platforms.
Is Facebook Stock a Good Buy Now?
No investor can predict the future, and historical data only says so much. Determining whether or not Facebook — or any stock, for that matter — is a good buy depends on a number of factors.
What the Analysts Say
Of 44 analysts who covered Facebook in July, 17 rated the stock a “strong buy” and 24 rated it a “buy,” according to Yahoo Finance. One analyst rated the stock a “hold,” one gave it a rating of “underperform” and one rated it a “sell.” This makes the stock’s average recommendation rating a 1.8 on a scale of 1 (strong buy) to 5 (sell). Price targets average $386.47 per share, compared to the closing price per share of $358.32 on July 29.
Most of the analysts are recommending that investors buy Facebook, but they’re also not expecting to see a repeat of last quarter’s performance.
What the Fundamentals Show
There are a number of metrics that investors use when they research stocks to determine the health of a company relative to others in its sector and to the market as a whole. One of these is the price-to-earnings ratio. The P/E ratio compares a stock’s price to the earnings per share the company generates. The ratio tells investors how much they’re paying for each dollar of earnings. So, if a stock is trading at $25 per share and earnings per share are $1, that stock has a P/E ratio of 25.
The P/E ratio is useful when comparing stocks to one another, to the sector they’re in, or to the market as a whole. As of July 29, Facebook’s P/E ratio is 30.70. The estimated P/E ratio for the tech sector for 2021 is 38.21, according to Fidelity. And the P/E ratio for the S&P 500 at the end of July is 33.75.
Of these three ratios — that of Facebook, the tech sector, and the S&P 500 — Facebook’s is the lowest. A lower P/E ratio is better since it means you are paying less for a dollar of earnings. So, since Facebook’s P/E ratio is lower than that of the S&P 500 and the technology sector, fundamental analysis says that the stock is a relatively good value.
How To Know If Facebook Stock Is Right for You
There’s another consideration that is often overlooked when deciding whether or not to buy a specific stock, and that is how it fits into your portfolio.
A good stock portfolio contains a good mix of stocks — small caps, large caps, growth stocks, value stocks, foreign stocks, domestic stocks, and stocks from many different industries. Diversification is important, even if you don’t have a large portfolio.
Advice
Before you decide to buy a stock like Facebook, you want to make sure your portfolio isn’t too heavily concentrated in technology stocks. This sector has had a good run recently, so it may represent a larger percentage of your portfolio than you think. That’s not necessarily a bad thing, but you may want to sell some of your other tech holdings if you decide to buy Facebook.
For some investors, another criterion they consider is the company’s mission, vision and culture. You may want to think about whether you consider the company to be a good corporate citizen and a fair employer before you choose to invest.
