6 Simple Reasons Facebook Stock Will Rebound in 2019

Facebook's (NASDAQ: FB) stock tumbled more than 20% this year due to concerns about its decelerating growth and ongoing privacy and security issues. Rising interest rates and a broader sell-off of higher-growth tech stocks exacerbated the pain.

However, I think investors are becoming too bearish on Facebook, which remains the world's top social network and doesn't face any meaningful competition. Here are six factors that could help its beaten-down stock recover in 2019.

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1. Offsetting soft DAU growth with higher ARPU

Last quarter, Facebook's daily active users (DAUs) in the US and Canada stayed flat both sequentially and annually at 185 million. Its DAUs in Europe rose 1% annually, but dipped by less than 1% sequentially to 278 million. This sparked concerns that the negative news cycle was throttling the company's growth in its two most profitable markets.

However, Facebook's average revenue per user (ARPU) in the US and Canada still grew 30% annually and 7% sequentially to $27.61 during the quarter. Its ARPU in Europe grew 29% annually and 1% sequentially to $8.82. Therefore, Facebook can still squeeze out higher ad revenues per user to offset a slowdown in DAU growth.

2. Growth in other overseas markets

Facebook's DAUs continue to steadily rise across its other two regions -- the Asia-Pacific and Rest of World -- which together accounted for 69% of its total DAUs.

DAUs

QOQ growth

YOY growth

Asia-Pacific

561 million

3%

18%

Rest of World

470 million

2%

9%

Facebook's Rest of World ARPU rose 14% annually to $1.82, but fell 5% from the second quarter, mainly due to currency headwinds and economic problems in Latin America. However, its Asia-Pacific ARPU grew 18% annually and 2% sequentially to $2.67, fueled by its growth in India, Indonesia, and the Philippines.

Those three countries have much higher GDP growth rates than the US, Canada, and most European countries. They all have budding middle classes with higher spending power, and likely aren't as concerned about the negative news cycle in Western countries. Over the long term, Facebook can rely more heavily on those markets as its growth in Western markets flattens out.

3. It's still an advertising powerhouse

Facebook and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google still hold a duopoly in online ads in most countries across the world. Together those two companies control nearly 60% of the online advertising market in the US according to eMarketer, so brands will still likely buy ads on their platforms first.

Facebook also owns Instagram, which is more popular among younger users than its namesake site. Instagram exceeded 1 billion monthly active users (MAUs) earlier this year, while Instagram Stories topped 400 million DAUs.

KeyBanc Capital Markets analyst Andy Hargreaves estimates that Instagram currently generates about 15% of Facebook's ad revenue, but that percentage could double to 30% in two years and account for 70% of the company's new revenue by 2020.

4. Plenty of cash and other irons in the fire

Facebook generated $17.5 billion in free cash flow over the past 12 months, and finished last quarter with $41.2 billion in cash and marketable securities. This gives Facebook plenty of room for buybacks, which it's aggressively executing as its stock price tumbles, as well as strategic investments and acquisitions.

Facebook still has plenty of ways to boost its revenue. It can continue expanding its streaming video platform Watch, which reaches over 400 million MAUs. It can add more e-commerce features to Instagram and nurture the growth of its video platform IGTV. It can add new ways to monetize WhatsApp, which reaches over 1.5 billion MAUs, add more in-app features to Messenger, or introduce new features to its Oculus VR ecosystem.

Facebook can also acquire other companies -- like smaller cybersecurity firms -- to secure its platform, clean up its act, and add another stream of non-advertising revenue to its top line. It's myopic to dismiss all those catalysts and proclaim that Facebook is doomed.

5. A very low valuation

In the low $130s, Facebook trades at just 18 times forward earnings. Analysts, on average, expect Facebook's annual earnings to grow 18% per year over the next five years, which gives it a 5-year PEG ratio of 1.0. A PEG ratio under 1 is considered undervalued, so Facebook's stock seems to be bottoming out at these levels.

Alphabet and Netflix both have 5-year PEG ratios of 1.6, and Amazon has a PEG ratio of 1.7. This means that Facebook is the cheapest FANG stock based on long-term earnings estimates.

6. Leadership changes

Lastly, Facebook could make management changes, like hiring a new chief operating officer, bringing more experienced tech and cybersecurity executives onto its board, or even hiring a new CEO -- as Google once did -- as Zuckerberg retains the chairman role. Any of those decisions could help Facebook's stock rebound.

Facebook's stock could remain in the penalty box for the rest of the year, but I think investors who focus on these six catalysts could be well-rewarded in 2019.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Facebook, and Netflix. The Motley Fool has a disclosure policy.