 Why did Facebook stock drop? Is it a buy now? What is the key to watch their revenue growth deceleration and am I buying the stock now and how does that fit a portfolio? Good day, fellow investors. My name is Sven Karlin. I'm an independent full-time stock market and business analyst and today we're going to discuss what's going on with Facebook and why I think that Facebook is misunderstood by analysts as it has been misunderstood for the past eight years. If we just take a look at Facebook's stock price it went from 40, 39 at the IPO down to 20 and now it's high it was a 20, 220 and now it's again down. So analysts and all those looking at Facebook stocks have always been wrong because if not then there wouldn't be the 10 time increase since 2012. So why did the stock drop recently? First a few months ago it was because of the Cambridge Analytica scandal and now it was because of the new revenue outlook. The company said that our total revenue growth rate decelerated approximately 7 percentage points so already we've seen the deceleration of revenue. Our total revenue growth rates will continue to decelerate in the second half of 2018 and we expect our revenue growth rates to decline by high single digit percentages. So during 2018 what are the reasons for that currency a slight headwind? Then they say that certain engaging experience like stories that currently this is something that everybody is missing currently have lower levels of monetization. So with the issues about data privacy regulation and everything Facebook is having some headwinds but then you have to see okay how fast will Facebook grow, what's going on and what's the impact on the actual value and on the actual long-term earnings. I have created a few models my present value models and I'll show them to you now. So this is my small model of Facebook's earnings. Here I have present value calculation I use a 15% discount rate because that's my required rate of return and here I have the growth rates you can see 1.2, 20% for the first five years and 1.1 from the subsequent five to ten years so the years from 2024 to 2028. Then I have a terminal value that I calculated by multiplying the earnings times 10 and then you have the present value. Sum of present values is the current present value of Facebook and this will explain you perfectly why the Facebook stock dropped so much. Look at this. This growth rate is 20% per year on earnings. If I just change that growth rate to 40% you have seen the stock price jump from 127 to 182 so that's just a difference of from 20% growth rate to 30% growth rate. If I increase the growth rate from the year 2024 till 2028 to 20% then the stock price present sum value goes to 243 and that's why when there is revenue deceleration or earnings growth deceleration then investors go into panic mode because small changes in those growth rates which are still growth rates and still amazing growth rates really affect what Facebook the stock price. Current Facebook revenue growth is 1.4% earnings growth is a bit faster but if they grow for the next 5 years at 4% the present value of the stock is 256 much higher than it is currently. If I change the discount rate mine is a little bit higher because I'm such an investor requiring higher returns if I put that to 10% you can see how the present sum value really explodes to 375 if I just change the growth rate by a bit it declines enormously and that is why the stock declines so fast in such a short period of time and here we are at a 10% discount rate 20% growth over the next five years subsequent growth by 10% terminal value earnings in 2028 times 10 price earnings ratio of 10 we get to the current around the current market price which means that if you want a 10% return you will consider Facebook a buy and even I might consider it a buy. Let's discuss more and see what can impact those growth rates will they be 1.3 or will they be 1.4 for the next five years and then 1.2 which leads to huge jumps in Facebook's price so the main question with Facebook is what will be its future growth if it grows faster then the stock price is undervalued if it go go roads slower then the stock price is overvalued and small changes in that growth affect in a big way the revenue the stock price sorry so what will impact Facebook's growth and is there potential for faster or slower growth with Facebook let's ask the biggest practitioner in the field and the person that knows much more about whatever we are talking here today here's the problem my friends Coca-Cola and BMW and Comcast and the Eagles and GE and the biggest companies in the world haven't invested properly into the feed yet the feed is just one feed right now it cost eight or nine dollars to get in front of a thousand people soon it's going to cost 50 and 90 and 200 and you're gonna sit and cry that you weren't doing more of this just like I cry that I didn't spend more money on Google AdWords from 2001 to 2004 when they were grossly underpriced let me show you why I know this Philly please do me a real honor and stand up right now if please stand up right now if besides live sports you basically mainly now watch Netflix HBO go Hulu or anything that's OTT if you're mainly watching Netflix stand up thank you bro I want everybody look around stand keep staying up I want everybody keep staying up look at this room we can all agree these aren't 13 year old kids this is now a good wide range of individuals and ages we have switched to OTT you can sit thank you 85 percent of this audience consumes this many television commercials nobody here watches television commercials Super Bowl the best we all watch it every other commercial the worst now let me give you data 80 let me say it nice and slow 80 billion dollars is spent in the making and distributing of TV commercials in America a year and all of its going directly garbage when Pepsi and Kellogg's and Kraft and BMW finally feel the pain of them throwing money directly in the trash which is coming they will switch it and it will come into this nice little place known Facebook and Instagram and everything else so Gary Vee says Facebook and Amazon I have made the same model for a lot of stocks including Amazon and simply Amazon is I don't see where the earnings are going to come on an earnings model Facebook looks much better for me for similar growth rates similar potential and everything ecosystem and everything and I have also been testing what Gary Vee has said so it's not just that he's saying it let me show you I have tested marketing for my stock market platform and for my book and here I have spent 15 euros and I have reached 1,700 659 people and those people of those people 1,104 engaged in watching at least three seconds or 10 seconds of the video for me that is insanely cheap which means that there is extremely high potential that the price of advertisement on Facebook quadruples let's say over the next 10 years and I will be spending 60 euros to reach let's say 1,100 engagements which is a fair price this is really really cheap and as Madison Avenue turns to digital more digital improves the value of these ads this will be happening this there is a high probability that this happens so if just the current ads on Facebook increase their price four times over the next 10 years that's 15% growth per year so put that into the model that's already somewhere there what the analyst expects 15% per year they expect now 20 for the first five years and then another 10 for the next five years so 15% just from revenue growth from increases in ad prices without anything else without the monetization of story more monetization of instagram whatsapp vr whatever that's all left to the upside therefore I consider facebook a buy now but everybody every time someone asks me what is it to buy they all expect that it will go up in the next three six months no a stock is an investment into a business that makes part of a portfolio and this is my want to be perfect portfolio the model portfolio how I see best portfolio now well hedged and all these exposures are then again depending on the risk and reward so this is what it would like in a perfectly balanced valued world so of that I will put facebook at 3% now from my whole portfolio which is a dollar cost averaging portfolio so it might increase further to 5% if there is more decline in the phase in the stock price which I always buy more if something that I think is valuable declines further so if you want to see more stocks that are valued at a similar way as we have valued facebook in this stock portfolio check my stock market research and you will find in depth stock analysis and all what's going on plus we will be continuing to cover facebook to adjust the model to things that change perhaps because it's not only about okay the facebook is now a buy it's also okay when it is extremely overvalued to sell it so for that you need constant coverage you need to know why you bought it and you need to cover the stock for the next I know five ten years and that's what will give you the right time to buy should you buy more and the right time to exit if it is the right time to exit perhaps facebook stock will double over the next two years but it won't be the time to sell it thank you for watching looking forward to your comments and I'll see you in the next video