Long-Term Facebook Investors Should View Any Post-Earnings Weakness As Buying Opportunity

MKM Partners says long-term investors of Facebook Inc FB should use the any post earnings weakness as a buying opportunity as he believes the “valuation collapse is premature.”

The comments came after Facebook delivered another strong quarter in advertising revenue growth and solid margins. But, investors remain concerned about management’s repeated warnings for a meaningful growth deceleration in the second half of 2017 due to their plans to limit ad load increases.

The stock’s P/E multiple has fallen back to 22.4x on higher forward estimates and a slight retreat in the stock price. The brokerage says a retest of 21.5x lows would imply $125 per share.

“We think the multiple collapse is premature, but do not expect the stock dynamic and sentiment will change until investors gain comfort that consensus estimates for 2H and 2018 are attainable,” analyst Rob Sanderson wrote in a note.

Meanwhile, investors are also concerned on potential margin impact from management's guidance for 47 percent to 57 percent expense growth in 2017. But, the analyst recalled that the company has under-spent initial guidance in each of the past three years.

As such, Sanderson kept his Buy rating and $150 target price unchanged as he still thinks the stock represents attractive value. However, the analyst acknowledged that a catalyst for outperformance may be lacking before mid-year.

“Long-term investors should view controversy as an attractive entry, but sort-term investors will not likely be interested until later in the year,” Sanderson added.