Facebook is a must-own stock, this portfolio manager says

With the largest one-day plunge in US market history, Facebook’s (NASDAQ:FB) fortunes are now being picked over with an increasingly finer-toothed comb. Is the social media giant headed for disaster? Hardly, says Greg Newman of Scotia Wealth Management, who claims FB still has tonnes of runway ahead of it.

On Wednesday, Facebook posted its second quarter financials, with the company generating $13.23 billion in revenue, a 42 per cent year-over-year increase, which nonetheless came in slightly lower than the consensus $13.36 billion. At the same time, Facebook beat the Street on earnings per share at $1.74 versus the expected $1.72 EPS (all figures in US dollars).

Yet it was the conference call with Facebook’s David Wehner that prompted panic, as the CFO explained that he anticipated operating margins to drop significantly over the next few years, declining from the recent 44 per cent to the mid-30 per cent range. That news was greeted with a steep selloff, erasing $119-billion of the company’s market value in trading on Thursday, a 19 per cent fall which represented the largest one-day dollar loss in the history of US public companies.

CEO Mark Zuckerberg said on the earnings call that the company now counted 2.5 billion people as users of its platforms, including Facebook, Instagram, Messenger and WhatsApp. Yet the company’s daily active users over Q2 grew by 1.44 per cent, down from Q1’s 3.42 per cent — another indication of a potential slow-down in FB’s growth.

In essence, the argument claims that Facebook is a victim of its own success. Already huge, the behemoth only has so much more room for expansion, both in terms of user numbers and revenue generation, and thus even though the company is still highly profitable, the thought is that returns will likely diminish over time.

Nonsense, says Newman, who points out that not only is Facebook just getting started in terms of generating revenue from its user base, but there are still a few billion more humans on Planet Earth just waiting to be colonized.

“The law of big numbers — they were saying that about Apple five years ago,” Newman told BNN Bloomberg. “It depends on how disruptive and how entrenched the technology is. If they have a third of the planet, why can’t they get half of the planet?”

“There are so many different ways that they could monetize that over time,” he says. “We’re still modelling 25 per cent earnings per share growth for a name that’s trading at 17x 2020 [earnings].”

As for FB’s chances of rebounding, Newman says there’s no doubt it’ll make up Thursday’s losses.

“You’ve gotta own this name, as long as you believe that they can execute,” he says. “Will it go up tomorrow? Probably not. It’s going to take some time to settle in, but around these spots you want to pick away at it.”