This week the Valens Research team highlights our most interesting equity insight from across our tools and our analysis.
The market is concerned about rapid profitability and growth declines, while management continues to see strong execution, spelling upside potential
Market expectations for FB are currently very pessimistic. The market is expecting
UAFRS-based (Uniform) ROA (ROA’) to fade from 65% in 2017 to 22% in 2022, with Uniform Asset growth slowing from 50%+ a year to 25% a year going forward. The market’s concerns about declining profitability and top-line growth rates accelerated after the most recent Q2 call. However, FB’s ROA’ has improved for the past five years as similar concerns have intermittently cropped up, and management continue to have multiple levers to pull to drive strong growth and ROA’ expansion, thanks to their strong brands. For context, even if the company did see margins decline at the rates they have communicated, ROA’ would fall to 50% over the next several years, not 22%. As such, market expectations, which appear to solely be focused on regulatory and cost downside, appear too pessimistic, spelling potential for equity upside.