Facebook (FB) reported a better than expected quarter across its financial and engagement metrics providing investors with a large dose of relief.  The shares extended the recent rally off the December lows and now sit 13% above the pre-earnings close, 35% above the Christmas Eve low, but remain 23% above the July all-time high.  It was in July that the company shocked Wall Street by sharply lowering its revenue growth and profit margin forecast.  Also leading to investor angst was weaker engagement (daily and monthly active users, time spent) coming while the company faced nearly daily negative headlines related to its data privacy practices.

Looking ahead, the street has accepted management’s guidance for a sharp slowdown in revenue growth and still elevated expense growth for 2019.  Following 4Q18’s better than expected results, revenue estimates for 2019 and 2020 moved up slightly, now at 25% and 20%, respectively.  This is against 37% growth in 2019 which decelerated form several quarters at or above 50% in 2018 and early 2018.  2019 will be a second consecutive year of significant margin contraction as the company spends heavily to fix its data privacy issues.  Operating expenses are again rising more than 40% this year.

The outlook for FB shares revolves around a few key issues.  First, will engagement levels hold in core Facebook as they did in 4Q18?  Second, will margins stabilize in 2020?  Many other issues are at play for FB including the core Facebook transition to Stories, Instagram’s ongoing growth, and monetization of WhatsApp and Messenger.  In addition, negative press is likely to continue and increased regulation remains a possibility.  Nonetheless, the two big questions will determine what P-E ratio the stock trades at and what EPS will be in 2020.

Both of these items could vary widely and street estimates already have above average variance.  Is FB a 20% plus growth company, so rare today among large cap stocks, and thus worth a premium multiple of 22-25 earnings like other growth blue chips?  Consensus EPS estimates call for $8.77 in 2020 yet Northlake’s spreadsheet can easily get to a range from $8.00 to $10.00.  A 20 P-E at $8.00 is a $160 stock.  A $25 P-E at $10 is a $250 stock.  At its low in December, FB trade at near 16 times 2019.  A 16 P-E on consensus 2019 estimates is $140.

Northlake thinks the worst is over for FB and the stock can head back toward $200 this year.  Thus, despite some ongoing concern about engagement and the Stories transition, we are sticking with FB positions for our clients.

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.