Ryan P. Johnson CFA, CFP®
Director of Equity Research
“Why didn’t you sell Facebook (ticker: FB)?” is a question we have heard a few times in recent weeks. On Monday March 19th the stock declined nearly 7% in response to reports that Cambridge Analytica kept user data for years after Facebook asked it to delete data, calling into question how Facebook manages third-party access to its users’ information. This also begged the questions “What does Facebook know about me”, “Should I delete Facebook”, and “How should Facebook be regulated”? The stock declined further that week but has since rebounded somewhat, even after CEO/Founder Mark Zuckerberg testified in front of Congress.
Our sell discipline is custom, not mechanical. Every company/stock has its own unique set of factors including: the general trend of the market and the industry in which the company operates, customer/end-market demand, competitive threats, regulatory risks, debt and interest rate levels, cash flow and profit forecasts, stock valuation, management changes, the timeline for a turnaround, and our best estimate about how sentiment may shift in the coming months/years.
For Facebook in particular, we were encouraged by the changes to the user agreement and other policies that were made before the Cambridge news broke and by the additional steps towards transparency that Facebook has made since the announcement. Near-term, we expect user growth and earnings growth to slow. This will be a focus when first quarter earnings are announced after 4pm on April 25. The company had already made changes to its algorithms to lessen the number of ads users see to enhance the user experience. The average number of hours spent on the site subsequently declined, and certain advertisers saw traffic declines. The Cambridge situation may receive more blame than it initially deserves because of what was already happening behind the scenes.
Near-term, some decline in the stock was warranted. Earnings estimates for 2018 and 2019 have declined about 4% since mid-March, but earnings still are expected to grow 17% in 2018 (roughly in-line with what is currently expected for the Technology sector and the S&P 500). Longer-term, Facebook will benefit from the increasing revenue it expects to receive from WhatsApp, Instagram, and Messenger. Earnings are expected to grow 21% in 2019, well above what is expected for the Technology sector and the S&P 500. As of the end of 2017, Facebook had over $40 billion of cash and short-term investments compared to less than $400 million of debt. The company has plenty of room for acquisitions and/or share repurchases to help revenue and earnings grow.
Facebook remains on our Buy List, but it is not appropriate for all investors (any one stock rarely is). If you have any particular concerns, please call us. We specialize in managing your investments around your unique situation and preferences. Thank you for your time and continued trust.