Shares of social media giant Facebook (NASDAQ: FB) recently touched $120. The stock is on a tear; shares have gained 13% year-to-date and are up 50% in the past one year. Compare this to the S&P 500 index, which is down 1% in the past one year, and it shouldn’t surprise anyone that Facebook stock has become a favorite holding of many of the biggest hedge funds.
In the first quarter, hedge funds loaded up on Facebook stock. Should you follow their lead?
$3 Billion in Facebook Stock
Hedge funds have piled into Facebook stock. According to research from FactSet, the top 50 hedge funds bought more than $3 billion of Facebook shares in the first quarter of the year. Viking Global Investors was the biggest buyer. Citadel was another major buyer.
Indeed, approximately 71% of Facebook’s stock float is held by institutional holders. More than 1,400 institutions hold Facebook shares.
The reason why Facebook is a “hedge fund hotel” is clear: growth. In a shaky global economy with slowing growth in many parts of the world and an increasingly volatile stock market, Facebook’s huge growth figures are attracting big buyers.
Last year, Facebook generated $17.9 billion of revenue, which soared 43% from 2014. Non-GAAP earnings per share, which excludes certain items including amortization of intangible assets and share based compensation, jumped 28% year over year.
Facebook’s strong results continued into 2016. First-quarter revenue and non-GAAP earnings per share increased 51% and 83%, respectively, from the same quarter last year.
Facebook’s growth is accelerating, which is truly shocking given how much it grew last year. The biggest driver of Facebook’s outstanding growth continues to be its impressive user numbers and the increasing monetization of these users.
Last quarter, Facebook had 1.09 billion daily active users, up 16% year over year. The social media platform is attracting more users, and with expanded offerings, user activity is increasing as well. Advertising revenue soared 57% last quarter.
This is particularly true when it comes to mobile devices. Mobile advertising revenue represented 82% of Facebook’s total advertising revenue in the first quarter, up from 73% in the same quarter last year.
Analysts see more of the same going forward. Facebook is expected to earn $3.56 per share in profit this year, based on average analyst estimates. That would represent 56% earnings growth from last year’s $2.28 in EPS. Next year, analysts expect Facebook to grow EPS by another 28%.
One catalyst for Facebook’s future growth could be news. Approximately two-thirds of Facebook users said they get their news from the site, according to a recent survey by Pew Research Center.
In addition, two other potentially huge growth catalysts for Facebook are video and messaging. Facebook users are increasingly utilizing more interactive services. Facebook is rapidly expanding its video offerings like Live and 360 Video. Separately, messaging could be another driver. Facebook has two of the top messaging platforms in the world—Messenger and WhatsApp, which have 900 million and 1 billion monthly users, respectively.
A Great Company, With 1 Caveat
Facebook stock seems unstoppable. While value investors are likely concerned by its sky-high valuation ̶ the stock trades for 72 times trailing earnings ̶ there aren’t many companies putting up Facebook’s growth. That explains why so many high-profile investors are willing to buy the stock, even at such a lofty valuation.
Plus, Facebook’s valuation actually looks palatable when considering its future earnings growth expectations. The stock trades for a far more reasonable 25 times forward EPS estimates. That valuation multiple is only slightly ahead of the S&P 500.
As a result, the biggest consideration for buying Facebook stock should be whether the company can meet its earnings targets. Expectations are high, but the company has a track record of surpassing forecasts.
Investors should expect volatility, but if Facebook can continue its impressive growth, the stock could still generate strong returns going forward.
This Is Making Ordinary People Rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her.