Facebook (FB) delivered 4Q19 sales and earnings above consensus estimates, and reiterated guidance for 2020. The stock traded lower, reflecting an appetite for a larger upside surprise. Since last quarter, FB climbed midway into Northlake’s $200-$250 target range based on reaching 20x-25x $10+ EPS this year or next. After the earnings selloff, FB is back near the low end of that range. Northlake still expects $10 EPS soon, with substantial upside in the coming years.

The details of the quarter were solid, but concerns about slowing advertising growth were more pronounced than usual. Last quarter, FB warned investors that 4Q19 faced an unusually difficult comparison due to the timing of several successful product launches in 4Q18. While ad growth did slow more than usual, it wasn’t unexpected and the deceleration in 2020 should be less dramatic. In addition, Northlake expects upside from disciplined cost controls as FB executes on many priorities in 2020. FB management typically provides clear and conservative guidance, and has been able to overdeliver in recent quarters. Expenses have risen well under management projections even as spending has been heavy to combat privacy concerns.

FB still faces regulatory challenges on many fronts. Privacy laws in Europe and California limit ad targeting, leading to less pricing power. While there has been minor disruption so far, this challenge will persist and maybe get tougher. Since 2020 is an election year, FB will face more scrutiny on issues like free speech, fake news, and campaign interference. The company noted new goals to communicate principles more clearly and stand up for people to help build communities as part of addressing the ongoing issues.

The investments FB makes to maintain growth have been paying off. Different ad formats effectively monetize new ways that people share and interact. Areas like video, news, and dating will be incremental improvements for many users. FB is focused on improving payments across the suite of apps. New hardware platforms such as augmented reality and virtual reality (AR/VR) are starting to grow in popularity. The billions of people who use FB services remain entertained and engaged.

Given the consistent execution, above average growth, and relatively reasonable valuation, Northlake finds FB attractive near the low end of our expected $200-$250 range. Investments in addressing privacy and security are necessary for now, and innovations on software and new hardware platforms may start to contribute sooner than investors expect. Northlake sees an operating margin inflection and $10+ EPS coming in the near term, with potential for much larger gains on the horizon.

FB is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov. FB is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.