I Can’t Believe Facebook Stock Is Still This Cheap
- Facebook’s stock rallied 40% in March and April.
- At its current price-to-earnings ratio, the stock is still cheap.
- Election ad spending means even bigger profits for Facebook.
Your profits might be even larger if you waited to buy, considering the stock dropped all the way to $139 in sheer panic selling the following week.
Yes, you could sell now and reap as much as 40% in less than two months.
But if I were you, I’d be holding onto shares for much bigger gains.
In fact, I’d consider it a gift from the market gods and buy more if the stock falls substantially below the current $200 stock price in the coming weeks.
1 Clue to Facebook’s Cheap Stock Value
Facebook’s stock is incredibly cheap, even after the big rally since mid-March:
FB Rallied 40% From Its March Low
Wall Street analysts expect the company to earn $7.50 a share in profits this year. Divide the current stock price by that number, and you come up with a price-to-earnings (P/E) ratio of roughly 25.
Basically, investors expect the company to grow its earnings by 25%.
Yet analysts are still projecting Facebook will earn $9.93 a share in profits in 2021 — a 32% jump in one year.
So that’s one clue to Facebook’s cheap stock value right there.
Given all the fear and bad news about the coronavirus out there, traders are unwilling to assign an even modestly higher P/E ratio to own the stock.
If they did, the shares would be closer to $240 (32 times $7.50) right now, instead of hovering at $200.
The True Impact of Political Campaign Spending
There’s another big reason to own Facebook stock right now — the November elections.
With traditional campaigning techniques limited by the coronavirus, I expect political ad spends by alternate means — social media, streaming TV, broadcast TV and billboards — to become even more important.
According to the Center for Responsive Politics, spending on political ads just for the presidential election ought to hit a record $10 billion. (The old record was set in Trump. vs Clinton in 2016, with $6.8 billion.)
A big chunk of that spending will go toward digital ad buys on Facebook.
But the money comes in sometimes unpredictable waves as campaigns respond to the ebb and flow of candidates, their messages and how voters react.
As a result, the spending is notoriously hard to model on an analyst’s spreadsheet. So the true impact of political campaign spending isn’t reflected in Facebook’s potential 2020 profits.
Grab FB Shares Now Before They Move Higher
The final reason to buy Facebook now is for its profits for next year.
There’s trillions in stimulus coming from the Federal Reserve and the federal government. And in 2021, the economy will be past the worst part of the coronavirus impact.
Facebook is in a prime position to benefit from those trends, as the economy perks up, and traditional ad spending bounces back.
There’s no doubt there’s plenty of challenges for the economy right now. But it also means plenty of opportunities to benefit from for stock investors.
In my view, Facebook is a great way to do just that.
Best of Good Buys,
Editor, Total Wealth Insider