Facebook has an incredible challenge in front of it: Goldman Sachs strategist

Brian Sozzi
·3 min read

Facebook (FB) is smack in the middle of its latest public relations nightmare stemming from how it polices content — which is quickly morphing into a financial nightmare — but that may not necessarily make the social media company’s stock a bad longer term bet.

“Facebook has an incredible challenge in front of it,” said Goldman Sachs Asset Management managing director Brook Dane on Yahoo Finance’s The First Trade. Dane specializes in fundamental analysis of tech stocks.

Indeed Facebook has challenges.

Unilever (UL), Coca-Cola (KO), Pfizer (PFE), HP (HPQ) and Yahoo Finance–parent company Verizon (VZ) have disclosed plans to pause advertising spend on Facebook’s platforms until founder Mark Zuckerberg lays out clear-cut measures to improve content policing. Constellation Brands (STZ)— maker of Corona beer and Robert Mondavi wine — told Yahoo Finance last week it has decided to halt spending on Facebook through July as well.

Facebook CEO Mark Zuckerberg testifies before a House Energy and Commerce Committee hearing regarding the company's use and protection of user data on Capitol Hill in Washington, U.S., April 11, 2018. REUTERS/Leah Millis
Facebook CEO Mark Zuckerberg REUTERS/Leah Millis

Facebook also continues to operate under a cloud of potential new government regulations within the next five years.

Despite the uproar from advertisers on content policing and likely hit to sales this year, Facebook’s stock has stayed resilient. The social media giant’s stock has gained 3.4% over the past month, according to Yahoo Finance Premium data, lagging the Nasdaq Composite’s (^IXIC) 6% rise but out-performing the relatively flat S&P 500 (^GSPC). Of the 55 sell-side analysts that keep ratings on Facebook, 47 of them still view the stock as a buy.

Analyst estimates for sales, operating profits and net income for 2020 on Facebook have remained relatively unchanged over the last four weeks, per Bloomberg data. Facebook’s stock trades on a forward price-to-earnings multiple of 33 times, a premium to the S&P 500’s 21 times and highest multiple on the tech beast’s stock going back to 2015 (via Yahoo Finance Premium analysis).

Borderline insane, all things being considered.

That resilience underscores Dane’s (and the bulls’, for that matter) bigger point on Facebook. Even in the face of numerous PR nightmares and yawning near-term sales headwinds, the long-term fundamentals for Facebook appear to be still favorable. Hence, the stock may not be overvalued at current levels.

“From a valuation standpoint, it’s not an expensive stock. If you take some of the big optionalities beyond the core advertising market, they have things like WhatsApp on the commerce side and the partnership they struck in India called Facebook Shop. All of these things can add material growth to the business over time and unlock value,” Dane explains.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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