Facebook (FB) reported a strong beat on 4Q20 sales and earnings, topping expectations for the third consecutive quarter. Guidance for 2021 was unchanged from the initial outlook provided last quarter. FB continues to caution investors about a potential headwind in 2021 from changes to Apple’s data privacy policy and warned that 2H21 faces difficult comparisons after the strong performance in 2H20. Despite again beating expectations, the stock traded lower following the report as investors digested the warnings about 2021.

FB typically issues conservative guidance on expenses early in the year and has done well to keep expenses below the high end of guidance in recent years. Northlake expects this to occur again in 2021 and sees the potential for operating margins to improve long-term as FB gets more control over the security and privacy issues that have been driving expense growth for the last couple years. Similarly, concerns around the revenue headwinds from Apple’s privacy change and difficult 2H21 comparisons should ease throughout the year. However, investors may remain cautious on FB until there is evidence that guidance and warnings are once again conservative. More details on the impact from the Apple privacy changes should emerge earliest in the year among these three concerns. Investors may have to wait until the 3Q21 report to have a better sense of where 2021 expenses and difficult growth comparisons will end up. Earnings estimates for FB increased after the report, signaling analysts’ faith in the company’s ability to continue outperforming expectations despite the upcoming headwinds.

Investors are paying a large premium for growth in today’s market environment.  However, FB appears very reasonably valued compared to its consistent and sustainable high rate of growth. A relatively conservative valuation of 25x 2021 EPS of $11.18 would imply a near-term target of $280, or 7% above the current price.  A P-E of 25x 2022 EPS of $13.50 would get the stock to $337 with upside of 28% from current levels. Should FB continue to beat expectations, EPS estimates for 2022 and beyond should keep climbing higher, and the 25x target multiple could have room to increase. Northlake is willing to look past 2021 headwinds and focus on 2022 EPS and our target of $337+/

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.