Facebook (FB) shares are trading down about 4% following the company’s 2Q21 earnings report.  The report was good across the board.  Financial measures including EPS, revenue, operating income, and profit margins all exceeded Wall Street estimates.  Engagement metrics matched estimates even as reopening economies likely distracted user attention.  Management guidance for the balance of 2021 included cautious comments about a slowing rate of growth due to tougher comparisons against the growth spurt in the stay-at-home economy of 2H20.  Management also continued to express concern about the impact of Apple’s privacy initiatives.

Investors have been expecting a slowdown in growth in 2H21.  In fact, interpreting management’s commentary, most analysts actually raised revenue targets for 3Q21 and 4Q21.  Operating income and EPS rose as well although the timing of expense growth in 2021 (lower in 1H, higher in 2H but no change to overall dollars) means that there will be less operating leverage over the next few quarters.

None of this comes as a surprise and in Northlake’s opinion is not the cause for the decline in the shares today.  Rather, it is the fact that expectations soared for FB after huge beats by Google, Snap, and Twitter.  FB beat estimates but by a lesser degree. In reaction to earnings reports, Wall Street is often very short-term.  For long-term investors like Northlake that is just something we must live with.  Our focus is on changes to the long-term investment thesis and whether a stock has gotten too far ahead of our price targets to offer above-average long-term return. 

We do not believe this is the case at FB, but similar to our views on Apple and Alphabet, the upside to our targets has moderated.  We expect FB to continue to report positive surprises against cautious management guidance comments.  This should lead to estimates rising for 2022 and 2023 that in turn raises our target.  FB shares may pause to allow earnings to catch up to the stock price.  Investor’s may also need to see that the post-pandemic environment allows for sustained growth but now off a much higher 2021 base.

When we discussed FB’s 1Q21 results three months ago, we established a price target of $375.  The shares closed at $373 yesterday before the 2Q21 report.  After today’s pullback, the shares trade at about 20 times 2022 estimated EPS.  This is a reasonable price to pay for what Northlake believes can be sustainable 15-20% long-term growth.  We see upside to $400 over the balance of 2021 with much higher targets as investor confidence about 2022 and beyond improves and matches Northlake’s view.

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.