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Forget Spending Concerns, Buy Facebook (FB) After Earnings

Shares of Facebook FB were down nearly 3% in morning trading Thursday as concerns over the company’s plans to spend more cash outweighed its solid earnings results. Nevertheless, the social media stock’s brief retreat from all-time highs might actually present the perfect buying opportunity.

Facebook released its third-quarter earnings report after the closing bell Wednesday. The company posted profits of $1.59 per share and revenues of $10.33 billion, beating our respective consensus estimates of $1.29 and $9.88 billion. These figures also represented year-over-year growth of 47.4% and 80.7%, respectively.

In addition to strong top and bottom line expansion, Facebook once again reported impressive user growth, with daily active users surging roughly 16% to hit a staggering 1.37 billion (also read: Facebook Posts Q3 Earnings Beat, User Growth Hits 16%).

But despite this estimate-crushing growth, investors seem to be concerned with the comments from the company’s polarizing founder and CEO, Mark Zuckerberg.

“Our community continues to grow and our business is doing well,” Zuckerberg said. “But none of that matters if our services are used in ways that don't bring people closer together. We're serious about preventing abuse on our platforms. We're investing so much in security that it will impact our profitability. Protecting our community is more important than maximizing our profits.”

Recently, Zuckerberg has emerged as the latest villain in the ongoing saga related to Russia’s interference in the U.S. election. As details chronicling the country’s use of Facebook to spread disinformation during the campaign cycle have emerged, Zuckerberg and the rest of his executive team have scrambled to save face and take accountability for the content published on their platform.

On top of this, increased public scrutiny over data security, punctuated by the devastating Equifax EFX breach this year, has the entire internet industry rethinking how its protects its users’ private information.

For Facebook, it appears the response is to double down on security, and the promise of new spending has investors fleeing this morning. But should they be?

In the wake of the company’s earnings announcement, at least 13 brokerages have already raised their price targets on the stock, with a median target of $208 representing a 13.9% premium to Wednesday’s record-high close.

“Yes, we take foreign meddling in U.S. elections very seriously. Call it what it is—political warfare. And countering will—and should—raise the cost of doing business for FB. But that business is inherently extremely impressive,” said RBC Capital analyst Mark Mahaney.

Mahaney’s firm made the most bullish call on Facebook, raising its price target to $230 from $195. In a similar vein, Susquehanna Financial’s Shyam Patil noted that Facebook has a history of outperforming.

“While the initial expense growth outlook for 2018 may have been more aggressive than anticipated, we would note that [Facebook] has a history of underspending guide, and we are currently well below the low end for expense growth in 2018,” Patil wrote in a note.

For now, Facebook remains a Zacks Rank #1 (Strong Buy). While this ranking could change based on possible estimate revisions in the near future, investors should understand that Zuckerberg’s plans to invest in security do not fundamentally change the remarkable growth story that his company has created.

This fiscal year has seen impressive top and bottom line growth, and we expect that to continue into fiscal 2018. In fact, our current consensus estimates are calling for earnings and revenue to swell by 21.8% and 31.1%, respectively, next year.

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