Facebook reported another strong quarter with revenue growing 56% and operating income up 73%.  Both figures exceed Wall Street estimates despite high expectations.  As it has consistently since going public, management provided cautious commentary on revenue and operating expense growth looking ahead.  Comments about revenue growth slowing next year and “aggressive investment” were almost verbatim from the last quarterly report and closely parallel repeated comments back to 2013.

Unfortunately, in a very nervous market that has already witnessed many good earnings reports meeting aggressive selling (most notably for Facebook was a selloff in Google after posting strong earnings), Facebook shares sold off as investors focused on the cautious commentary.  Northlake expects Facebook to again exceed its own guidance and views the pullback as an opportunity.  We do believe that a recovery in the shares could be prolonged because they are already so widely held and Wall Street has a tendency to penalize stocks in the near term when revenues and earnings growth is decelerating.  Even when it slows from 59% to 35%!

Current consensus estimates for Facebook call for EPS of over $5.00 in 2017.  We think that will prove conservative.  Given the growth rate and the company’s dominant competitive position in advertising, we find the share a bargain at only 23X 2017 and under 20X 2018.  Northlake is staying the course on Facebook and would look to add to positions on further material weakness.

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.