Facebook has grown revenues by 60% over the past 5 years, with profits rising 50% per year. 2014 was no exception, and profits actually jumped 100%, thanks to an improvement in EBIT margins and of course high revenue growth. Free cash flow to sales has reached 29%, which clearly indicates that Facebook needs little cash to support and grow it's business, that's exactly a business I am looking for (10% and higher is usually good, 30% is awesome!).
FB has grown it's monthly active users every quarter for the past 3 years, with the highest growth coming from Asia and South America (US and Europe is still growing at a slower pace). ARPU (average revenue per user) has more than doubled over last year, with USA getting the most (9$), what's around 6 times more than in Asia. However, this is where Facebook expects the highest growth over next years. Let's take a look at financials:
So how much are facebook shares worth? It is one of the most closely watched stocks out there, with hundreds of funds and analysts glued on it, so can it be undervalued?
- assuming 30% growth for the next 5 years, 15% growth for year 6-10 and 2% growth thereafter
- discount rates 6%, 7% and 8% (CAPM indicates a discount rate of only 4.32%)
- net income of 2.9 billion USD for 2014
Under relatively conservative assumptions, we can see that FB is still undervalued by at least 13%, and offers only 10% downside in a 8% discount rate case. Facebook is currently growing at 60% per year, and does not show signs of slowing down much, so it looks like there is a lot of room in it.
FB has a lot of cash and a tendency to overpay for acquisitions. They bought WhatsApp for 17 billion, with 4.6 in cash and rest in stock, also acquired Oculus. There has not been a clear benefit from these yet, so we will have to wait, but Facebook carries goodwill of 17 billion on books, which might be written off if these companies do not generate enough cash. Even though Facebook has a wide moat, someone might come up with a disruptive product again (like they replaced MySpace), which would mean lost users and revenue. One company, Ello positions itself as anti-facebook and they have attracted quite a following, but do not represent a threat to FB so far.
Looking at P/E or P/S might be tricky, because growth stocks always sell at high multiples for many years, so by excluding those with high multiples you miss some of the most promising titles. I will initiate a position in FB today with a 12% weight in my portfolio and 9% stop loss. After all, it's a bull market, you know?