I have been debating whether or not I should buy Facebook (NASDAQ: FB) shares for some time. However, whenever I have looked at the stock in the past, I have consistently concluded that it is far too expensive.
However, after watching the business for nearly a decade now, my opinion of the firm is beginning to change.
Should I buy Facebook shares?
Facebook is the business people love to hate. Not a week goes by when the enterprise is not in the papers. At the moment, the company is under pressure from a whistleblower who has accused the social media group of putting profit over people.
These accusations may hurt the company’s reputation, but it is unlikely consumers will stop using the platform altogether.
It is also unlikely advertisers will stop using this platform long term. After all, it has become one of the world’s largest funnels for digital media spending. In the US alone, Facebook has a 25% market share of the digital ad market.
These are the qualities that have convinced me that I should buy Facebook shares. However, as I noted above, the company’s valuation has always put me off.
This is starting to change. After recent declines, and after taking account of the company’s projected growth for 2021, the stock is currently changing hands as a forward price-to-earnings (P/E) multiple of 17.5. After factoring in earnings growth, it is dealing at a PEG ratio of 0.9. A PEG ratio of less than one suggests an investment could offer growth at a reasonable price.
On top of this, the company’s balance sheet is stuffed with $61bn of cash.
Considering all of the above, I would buy Facebook shares today. Still, I am not going to ignore the risks facing the enterprise entirely.
I think it is only a matter of time before regulators start to attack companies like Facebook and demand more onerous controls. I believe the company has the financial firepower to deal with these changes. Nevertheless, additional regulations will increase costs and compress profit margins.
At the same time, competition is eating away at Facebook’s share of the digital ad market in some markets. The group still has a substantial head start over competitors, but I will be keeping an eye on competition going forward.
Despite these risks, I would buy Facebook shares, considering its valuation and growth potential. Consumer demand for its products is only increasing, and products like WhatsApp and Instagram are very sticky. Some businesses have developed their entire operating model around these products. They are also an invaluable tool for many other companies.
I think it is unlikely that these competitive advantages will be eroded, even if regulators start to attack the business. I think the stock’s current valuation presents an attractive entry point for me to buy this growth.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Facebook. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.