facebook stock analysis

Facebook Stock Analysis – Only What Matters

Facebook stock analysis

Facebook (FB) can be a simple or complex stock to analyze, depending what you focus on. I’ll do my best to keep it extremely simple and focus on the core things FB is. Given the huge amount of information on FB out there, it is easy to lose sight of what really matters.

This analysis will include a:

  • Quick fundamental analysis
  • Overview of future growth opportunities
  • An earnings model implementing the above.

Here is the Facebook Stock Video Analysis, article continues below:

Facebook stock analysis – video

Facebook stock fundamental analysis

FB’s earnings over the last 12 months were $18.4 billion. If we adjust for the $5 billion legal charges paid in Q1 and Q2 of 2019, the earnings are $23.4 billion.

Facebook stock analysis
Facebook stock analysis

Facebook stock earnings – Source: FB Investor relations

On a market capitalization of $522 billion, the adjusted price to earnings ratio is 22 that is in line with the market’s valuation.

However, the market’s growth doesn’t come even close to FB’s growth which would make FB undervalued. Revenue growth has been a staggering 24% for Q4 2019.

Facebook stock analysis
Facebook stock analysis

Facebook stock revenue growth – Source: FB Investor relations

The high growth rate makes FB a growth stock, thus not to be valued as the same rate as the market. As with any growth stock, the returns a shareholder can expect, will be related to future growth rates. If the growth rate stays high, you can expect high returns and vice versa. Fortunately for us, Mark Zuckerberg discussed FB’s growth plans in his last conference call.

Facebook stock growth potential

In short, the following notes comprehend Mark’s views on Facebook’s future:

  • Private social platform, more intimate communities
  • More commerce and payments (WhatsApp Payments, Facebook Pay, Libra)
  • The next computing platform (AR and VR)

How and when will those projects gain traction, nobody knows, but FB has shown it has a strong testing capacity and great decision-making process.

I would not expect growth to come from an increase in the number of users as it is stable. I would even go as far and say the number of real users is actually declining and the growth shown below is just from fake accounts.

Facebook stock analysis
Facebook stock analysis

Facebook stock analysis – monthly active users – Source: FB Q4 Slides

More risks related to FB are a decline in advertising which could happen in 2020 due to the current situation. You never know whether there will be more scandals and there is always the threat of other platform. FB dealt well with Snapchat, now we have to see what will be the impact of TikTok. But, one thing is sure, platforms will constantly be coming and testing FB’s moat. However, the longer FB lives, the longer it is likely to stay strong and reap huge future rewards.

The potential rewards include:

  • We are in a winner takes it all world (not just about advertising like most analysis see it) – AR, VR future.
  • The payments and computing platforms – access to people – might be, might not be – they will keep working!
  • Instagram shopping and higher monetization of current platforms.

Facebook stock analysis – earnings model

I have analyzed FB during the summer of 2018 and my present value was $183 with a 10% discount rate assuming 20% growth in the first 5 years and 10% growth later with a terminal value of $259 based on a very conservative valuation of 10.

2018 FB earnings model:

Facebook stock analysis - earnings
Facebook stock analysis – earnings

I have adjusted the earnings model for 2019 where the adjusted EPS is $8.56.

2020 model:

Facebook stock analysis – earnings

With a growth rate of 20% for the coming 5 years, 10% in the subsequent 5 years, a 15% discount rate (required return) and a conservative terminal PE ratio of 10 in 2030, FB’s present value is $168. Thus, if you wish for a 15% return, FB might offer you such a return.

By keeping the growth rate at 20% from 2025 to 2030, with a terminal PE ratio of 15 and a 10% discount rate, FB stock present value is $421:

Facebook stock analysis – earnings

Given the possible present value range of between $168 from a conservative standpoint and $421 from an aggressive growth, but possible standpoint, I would argue, FB stock is a buy.

My personal strategy with FB

As a value investor, I always prefer tangible assets but we all know the world has changed since Benjamin Graham wrote the intelligent investor. Further, as Walter Schloss used to say that you can only know a stock if you own it, I have purchased FB as a growth stock for my Learning portfolio from where I source ideas for my other portfolios.

Investing strategy:

Added to the Large Lynch Learning portfolio – to follow, strike with other portfolios when expected return is higher. For now, the return is in line with the growth – likely 15% long-term, until something new comes along, something they’ve been working on.

On the risk and reward, we have explained the upside above where in a positive scenario, the stock could easily reach $795 in 2030. The risk is also there, if there is more regulatory pressure, more scandals, governments want a cut within the payments system or there is a new better platform that comes along, FB stock could easily fall below $100 and then stay there as it struggles to emerge from the dirt. See how the risk and reward fits your portfolio.

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