FB – Although management sentiment suggests the potential for near-term headwinds, market expectations are far too bearish, suggesting longer-term upside remains warranted

• Facebook, Inc. (FB:USA) currently trades above historical averages relative to UAFRS-based (Uniform) Earnings, with a 26.5x Uniform P/E. Even at these levels, markets are pricing in extremely bearish expectations for the firm, and while management’s concerns about privacy controls, government regulation, and expenses suggest the potential for near-term headwinds, the firm’s leadership position in its space and management’s confidence about user engagement rates suggest longer-term upside remains warranted
• Specifically, management may be concerned about their ability to reorganize their services following the FTC settlement, and they may be concerned about the impact future privacy controls will have on the business. Furthermore, they may be exaggerating the demand they see for payment features in their apps, and they may be concerned about seeing full payments approval in India. Additionally, they may lack confidence in their ability to monetize the Facebook marketplace, and they may be concerned about the sustainability of recent growth in Europe. Finally, they appear concerned about the sustained impact of higher expenses related to their FTC settlement
• That said, even with near-term headwinds suggested by management’s pessimism, long-term outperformance remains warranted at current valuations if FB is able to just maintain profitability at current levels.