Investors hungry for a deal may be thinking Facebook (NASDAQ:FB) is now hitting bargain basement prices. Not yet, says Bryden Teich, partner and portfolio manager at Avenue Investment Management, who claims that even with its recent selloff, FB is still too expensive.
It’s been a turbulent year so far for the social media company, which saw its share price plummet in March as a result of being implicated in the Cambridge Analytica privacy and data sharing scandal. The stock recovered impressively over the following months and reached a new record high of $218 by July 25. (All figures in US dollars.) But a poorly received earnings report along with a number of fresh allegations about its business practices have once again pulled down the stock, which at the opening bell this morning sat at $174.04, a 20 per cent drop over less than a month which has effectively erased all of FB’s gains in 2018.
The stock may still not be a buy, though, says Teich, who worries that more problems could be dogging the company going forward.
“There’s obviously been a lot of volatility around this [stock],” Teich told BNN Bloomberg. “At the beginning of the year, when we had gone back and said, ‘At what level does this become compelling?’ We kind of did our math and say that at $120 we’d be really interested in the stock because the earnings profile would still be pretty good.”
“The problem right now is that they’ve really had to ramp up their investments in people and their operating expenses have gone up significantly,” says Teich. “So, margins are coming down. Daily active users and monthly active users are starting to slow, as well. And so, you’re at a pretty high multiple.”
Facebook’s second quarter earnings report in late July featured revenue of $13.23 billion, which was moderately lower than the consensus expectation of $13.36 billion. Growth in daily active users was also lower than expected, while the company’s projected advertising revenue growth for 2018 came in lower than for 2017.
This past week, news broke that the US Department of Housing and Urban Development had filed a grievance against Facebook accusing it of discrimination in its advertising practices, while in a separate story, an Oakland, California-based company is reportedly suing the company for misrepresenting the potential reach of its Ads Manager tool.
“I think somewhere back in the $160, $150 range if you were willing to just buy this and hold it for five years, you’re okay,” says Teich. “It’s not a name that we own, but I still think there’s a lot of regulatory risk or headline risk with this name, and so you might be able to get it cheaper than here.”