Buy Facebook (FB) Stock On Q1 User Growth & Instagram Strength?

Facebook (NASDAQ:FB) shares soared through morning trading Thursday after the company reported stronger-than-expected revenue results and helped prove to Wall Street that privacy worries are overblown. Not only was Facebook’s user growth impressive, its Instagram platform continues to expand and helps provide a glimpse into what could be a more robust e-commerce future for Facebook.

Q1 Overview

Facebook’s Q1 revenue climbed 26% to reach $15.08 billion and top our $14.97 billion Zacks Consensus Estimate. At the bottom end of the income statement, FB’s earnings sunk from the year-ago period, driven by a one-time charge of $3 billion it set aside for the possibility of a Federal Trade Commission fine. Without the charge, the social media company’s adjusted earnings came in at $1.89 per share, which topped our $1.66 per share estimate.

Meanwhile, Facebook’s daily active user total popped 8% from the year-ago quarter to reach 1.56 billion, matching Wall Street estimates. The firm’s monthly active users jumped by the same 8% to close at 2.38 billion and beat expectations. More importantly, Facebook executives estimate that over 2.1 billion people use at least one of its “family” of services—which includes Facebook, Instagram, WhatsApp, and Messenger—every day on average. On top of that, Facebook’s family of platforms hit 2.7 monthly users.

The user total growth slowed slightly from Q4 2018’s 9% expansion. But when you are reaching roughly 35% of the world’s population every month the law of large numbers makes year over year growth harder to come by. With that said, shares of FB soared as high as around 9% in morning trading. The climb is part of much more impressive 2019 comeback for Facebook, which has seen it stock soar nearly 50% to crush FAANG peers such as Netflix (NASDAQ:NFLX) , Amazon (NASDAQ:AMZN) , and Apple (NASDAQ:AAPL) .

Still, shares of Facebook rested roughly 12% below their 52-week high at $193 per share through morning trading, to possibly help give FB stock some more room to run.

Growth Outlook

Facebook stock tumbled in 2018 on the back of privacy-based concerns and worries about possible government intervention. Yet, until the users really move on, advertisers will continue to spend billions across the company’s array of platforms, including its increasingly popular photo and video sharing app. Mark Zuckerberg’s firm simply reaches too many people in an age where traditional ad-supported platforms such as TV are being taken over by subscription services.

Facebook and Instagram feed ads currently account for a large portion of the company’s business. Going forward, the popularity of its Snapchat (NYSE:SNAP) -style Stories feature is set to play a major role. Plus, FB’s CEO has actively invested in the company’s e-commerce future to expand beyond its core ad business. This includes its new Checkout on Instagram feature that allows users to shop directly through the app. Deutsche Bank (DE:DBKGn) analyst said the new Instagram shopping feature could add $10 billion of revenue in 2021.

Checkout is currently in closed beta for select businesses in the U.S., including Adidas (OTC:ADDYY) , Michael Kors (NYSE:CPRI) , Nike (NYSE:NKE) , and roughly 20 other firms. Zuckerberg also recently detailed plans about how Facebook could start to focus on private encrypted messaging, payments, and other services in a move that would see it transition toward Tencent’s (OTC:TCEHY) WeChat model. “I think what we're going to end up seeing is building out Payments, which is going to end up being something that we do country-by-country.” Facebook’s CEO said on the company’s conference call.

“We have a test that is running in India for WhatsApp now, we're hoping to launch in several other countries at some point but I don't want to put a timeframe on that here, but it's something that we're actively working on.”

Bottom Line

At the moment, Facebook’s full-year 2019 revenues are expected to surge over 23% to reach $68.89 billion, which could change based on its solid Q1 expansion. Peeking ahead to 2020, the firm’s revenue is projected to jump 20% above our current year estimate to hit $83.05 billion.

The company has, however, committed to improve security measures, expand its business, and more. These measures will cost Facebook even more than executives initially anticipated. Facebook on its earnings call said that its full-year 2019 total expenses will grow by between 47% and 55%, up from 40-50%. This will likely cause Facebook’s full-year earnings to slip more than our current 0.53% projected decline. Still, Facebook’s 2020 earnings are projected to climb and its estimate revisions have trended in the right direction to help FB land a Zacks Rank #2 (Buy) at the moment.

FB is also trading at 23X forward 12-month Zacks Consensus EPS estimates. This marks a discount compared to its industry’s 28X average and its own three-year high of 44.3X and 27.3X median. Therefore, it’s not too hard to say that Facebook stock appears to be relatively “cheap” right now.

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