Is It Finally Time to Buy Facebook (FB) Stock Ahead of Q3 Earnings?

Shares of Facebook FB opened higher Thursday as stocks tried to rebound on the back of solid earnings reports from Tesla TSLA, Microsoft MSFT, and others. Fellow downtrodden social media companies Twitter TWTR also posted a bottom line beat and solid ad revenue. Therefore, it makes sense to see if investors should think about buying FB stock ahead of its Q3 financial results on Tuesday.

What Are the Worries?

Facebook stock and the company have been beaten down throughout 2018. The Cambridge Analytica scandal, the first major misstep by Mark Zuckerberg’s company that truly hurt FB’s reputation and its shares, does not seem like it will have a huge impact on the company monetarily, at least in terms of fines—for now. The UK’s privacy watchdog on Thursday fined Facebook just $645,000 for allowing Cambridge Analytica access to user data.

The fine, which was the first official fine handed down due to this issue, was only so small because it was all that was allowed under old laws. But investors should still pay attention to privacy concerns going forward because they will likely impact the likes of Facebook, Google GOOGL, and other major tech companies with access to vast amounts of consumer information.

Facebook’s user data scandals have forced the company to spend more money to monitor and protect data. Last quarter, FB stock tumbled because of slowing user growth in some key regions, but also because Facebook said its operating margin is expected to fall to the “mid-30s on a percentage basis” over a more than two-year period. Zuckerberg’s firm posted an operating margin of 44% in Q2, which already marked its lowest level in the previous last five quarters.

It’s Cheap

Now that we have covered why investors are nervous about Facebook, we should see if there are any reasons to be more upbeat. Right off the bat, it is always worth remembering that no stock is always bad because at a certain price and valuation level it might just be too good to pass up.

Coming into Thursday, Facebook shares had fallen nearly 16% since the start of the year and roughly 13% over the last 12 months. FB stock closed trading Wednesday at $146.04 per share, down about 33% from its 52-week and all-time high of $218.62 per share.

Moving on, Facebook stock is currently trading at 18.6X forward 12-month Zacks Consensus EPS estimates. This not only represents a discount compared to its industry’s 26.7X average but also marks the lowest earnings multiple FB has ever traded at in company history.

Facebook stock has traded as high as 31.5X over the last year alone, with a one-year median of 23.3X.

What Else?

Clearly, investors can see that FB stock appears rather cheap at the moment. But if the company’s future looks dismal it doesn’t really matter much.

Facebook is still expected to control roughly 21% of the US digital advertising market in 2018, according to an eMarketer report. This would place Facebook in second place behind only Google.

As Facebook pushes further into live streaming video, which includes lives sports around the world, it could become an even bigger advertising player. Facebook, like Twitter, also has an advantage because advertisers have to find somewhere to reach people as subscription services such as Netflix NFLX and Amazon Prime Video AMZN grab more and more users away from linear TV.

With that said, even if Facebook’s user base fails to expand at its previous rates—which was going to happen eventually, no matter what—its platforms, including Instagram, offer advertisers access to people that are becoming harder and harder to reach. And despite all of the backlash, Facebook’s Q3 revenues are projected to climb 33.8% to reach $13.81 billion, based on our current Zacks Consensus Estimate. FB’s fiscal 2018 revenues are also expected to surge by 36.3% to hit $55.40 billion.

At the other end of the income statement, Facebook’s adjusted quarterly earnings are expected to slip 8.2% to $1.46 per share. Yet, FB’s fiscal year earnings are projected to jump by 14.6% amid rising costs. FB is also currently a Zacks Rank #3 (Hold) based on its recent earnings revision trends.

Meanwhile, Facebook’s monthly active user base is expected to climb year-over-year and inch upward sequentially in its most important regions, the US & Canada and Europe, based on our NFM estimates.

Bottom Line

Better still, Facebook’s average revenue per user in the US and Canada—where it made nearly 50% of its revenues last quarter—is projected to soar 43% from $21.20 in the year-ago period to $30.31. This would also mark a 17% sequential jump from Q2’s $25.91.

Overall, FB’s ARPU is projected to jump by 20.5% from $5.07 in the year-ago period to hit $6.11 in the third quarter. It is worth noting that Facebook’s ARPU will become even more important as its overall user growth slows.

Plus, Facebook’s MAUs in its Asia-Pacific region are projected to jump by 128 million, or 16% to reach 922.50 million. Therefore, it seems like it might be worth considering buying FB stock ahead of its Q3 earnings release on Tuesday, October 30.

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