Stock Price & Analysis Today (July 2021)
In a twist of recent events, Facebook (FB) finally made some positive headlines. They were under Federal Trade Commission (FTC) scrutiny (again) for antitrust behavior. The FTC claims Facebook had gained monopoly powers through its acquisitions of Instagram and WhatsApp, and making them inoperable with other platforms.
The good news (for FB shareholders): The court held in favor of Facebook, suggesting the FTC waited too long to bring their suits, and there was no law suggesting that Instagram and WhatsApp needed to make its services interoperable.
This was great news considering Facebook settled with the FTC for $5bn less than two years ago with issues relating to user privacy. Shareholders didn't want any of this FTC heat, again.
What is Facebook?
I'm assuming you're not asking this question, because of the 7.8 billion people in the world, there's nearly 3.5 billion using Facebook, Instagram or Whatsapp! That's almost half the world's population 😳 ...let that sink in.
Facebook has come a long way since it was founded in 2004 in Mark Zuckerberg's Harvard dorm room. It's also been really interesting and fascinating to watch the Zuck evolve as well. For a founder to evolve into a CEO of (now) a trillion dollar public company takes a lot... and, I honestly don't see Zuckerberg getting enough credit for that. A founder and CEO successfully running a company is always a major plus point for me, when investing.
Facebook's business model, in short goes something like this: the users are "the product", the advertisers are "the customers", and Facebook is "the agent". Being a Facebook advertiser myself, and having spent hundreds of thousands on Facebook, I can tell you there is absolutely no competition to Facebook's ad platform and targeting. And, it's not just me saying this, because it goes to show in their financial results as well.
Key Financial Metrics
Aside from revenue, which you can see above, FB has been absolutely killing it. There are few growth companies that have any comparable profits, cash flow, and strength in their balance sheet.
Let's first take a look at the source of their revenue growth because it's important to understand what's going to continue to drive this.
Average Revenue Per User (ARPU) – along with Daily Active Users (DAUs) or Monthly Active People (MAP) – are common metrics in valuing tech companies and social media networks. From Facebook's breakdown of MAUs and ARPU by geography, it's clear to notice some trends.
As a geography matures, like North America and Europe, Facebook has been successfully growing the ARPU to keep the growth alive. The APAC and European regions are still seeing double digit growth. Though there are some risks here (noted later) we can understand the path to future growth.
FB has been proven to continuously innovate and update their platforms to keep it relevant and most monetized. I personally think they have successfully implemented Instagram Stories (to compete with Snapchat) and Reels (to compete with TikTok). There is also a lot of monetization potential with e-commerce, and even WhatsApp. It may be hard to believe, but Facebook is arguably still under-monetized. Crazy, right?
Some other noteworthy product additions FB has launched includes live audio rooms & podcasts (Clubhouse competitor) and newsletter service for creators called Bulletin (Substack competitor). Yes, you might call this copying rather than "innovating"... but hey, it's been working.
The most impressive metric, for me, is FB's 40%+ operating margin. For a company that size, that is simply insane! They are just raking in cash. Let the $65 billion (between cash and marketable securities) sitting on their balance sheet speak for itself. 🤑
The two biggest risks with Facebook are (1) user saturation and (2) regulatory scrutiny. However, Facebook has been successfully defending both. They have been constantly updating their platform to keep up with the latest social media trends with content consumption, which we discussed earlier. The regulatory risk is something that FB stock has proven to defeat time and time again. The negative headlines have so far only presented buying opportunities, and I expect it to continue to do the same.
Facebook seems to be adapting and evolving even from threats such as Apple's new iOS changes. When Apple rolled out the requirement for users of its devices to consent for each app to use the Identifier for Advertisers (IDFA) – which Facebook advertisers rely on to track performance – it was initially a big question mark on Facebook revenues. However, more recently, Facebook seems quieter in its campaign to support small business advertisers. It's stated that mostly the Audience Network (less than 10% of ad revenues) will be affected by this. However, this will be a key item to look out for in Q2 earnings.
The valuation and price target sheet is accessible to paid subscribers only. It is only useful if you are interested in playing around with the assumptions I've made and coming to your own valuation and targets. But, you'll be able to see the general assumptions on the YouTube video above.
I used the 2-step FCFE Discount Model to come to an intrinsic value of $490.00 per share. I've cross-referenced my cash flow and discount rate assumptions with analysts averages, and feel confident with this valuation.
Not to our surprise, FB is undervalued.
FB also boasts an impressive PEG ratio (1.40) and ROE – two of my favorite ratios.
MY PRICE TARGET: $450-500
At the time of this writing, FB stock today is $350. I am a buyer here to start a position. Considering potentially shaky market conditions ahead and a potential pullback from any Q2 earnings surprises (i.e. IDFA or slowdown in user growth post-COVID), I would back the truck up anywhere less than $300/share.
Facebook has been a volatile stock, so look for buying opportunities!
As always, this is my opinion only (and not financial advice). If you enjoyed the content, please share and consider subscribing to the newsletter and YouTube (if you're not already a member). Cheers! 🥂
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