Anyone that’s getting involved in investing is aware of the existence of the FAANG (Facebook, Amazon, Apple, Netflix, Google) stocks… arguably expandable to include Tesla & Microsoft as well. These make up the largest tech stocks on the market, and provide the biggest moves in popular indexes like the s&p 500. This visibility seemingly makes it difficult to find deals, however, one gem has managed to slip through and end up historically undervalued from the rest of the bunch - allowing us value investors to pick up shares at a serious discount!
The first thing that we need to talk about is the relative valuation of the company on an earnings basis… With a f p/e of under 23, and a long-term growth rate expected to continue to be above 20% for at least the next five years, this company is an absolute bargain compared to any stock out there - especially when you consider that it is a blue-chip company! This is evidenced all the more when we consider its value compared to other tech giants:
Microsoft - f p/e of 30, with sales growth under 15%
Google (arguably the most similar to fb) - f p/e of 27 for sales growth of 17%
Aapl - f p/e 26 for sales growth of 4% past this year (fb has higher sales growth this year too)
While all of those companies can differentiate themselves, this level of disparity amongst a group of stocks courting essentially the same investors is appalling. Especially for a company with a phenomenal balance sheet (75B in current assets & essentially no debt), all while having predictable & growing cash flow).
Facebook’s business model is also nothing to sneeze at. They are the undisputable pinnacle of social media, with the brands of Facebook, Instagram, WhatsApp, Messengerthe company has over 4 Billion MAU’s. They also own Oculus, which is a pure-play on VR. This dominance in the social media space, a space that continues to grow internationally, puts Facebook on a multi-year trajectory for growth. Facebook’s value proposition is clear when we consider that it has the highest monetization per user of any platform - a # that continues to grow as it better learns to target users & improve impressions, and while the digital advertising economy grows and boosts companies’ need to be on the premier social media platform. Facebook is also continuing to innovate new ways to improve monetization - through new developments like Instagram being a shopping destination, or by finally starting to monetize WhatsApp’s Billions of users through things like WhatsApp Pay. Finally, it's got a lot of room to run in international markets, especially India, where it is having phenomenal penetration rates.
There seems to be only one risk relating to Facebook, and it’s the existence of regulatory pressure. Though a valid concern, what with Facebook’s dominance & the fact that it’s business model relies on what is essentially an invasion of privacy… especially after a recent report that 33% of teenage girls on Instagram felt worse after using the platform. However, it would be very difficult for any legitimate regulatory action due to the fact that not only is facebook not a monopoly, it holds a minority of the advertising industry - and even in the social media space, there are a lot of other alternatives for consumers… Additionally, even in the worst case, where WhatsApp & Instagram get spun-off, we would still own part of both companies, and be left with a cash generating beast in FB, that might even start paying a dividend & a fast growing social media company in Instagram & WhatsApp that might lead to an even higher valuation…
All of this, before we even consider that all Big Tech companies face some level of government & regulatory scrutiny, along with legal consequences from that scrutiny, and yet still trade on elevated multiples to Facebook:
Apple just had a loss in an Epic Games Lawsuit relating to their app store banning external purchasing links, which could have a substantial hit on their App Store revenue.
Google faces similar antitrust & customer privacy concerns as facebook from the DOJ & other authorities
Amazon is arguably the most used example of worker mistreatment on Capitol Hill.
The last thing I wanted to take a look at was FB’s DCF valuation. Though it is a challenge to value high growth tech companies because of the difficulty surrounding the perpetual growth rate and how that can be problematic in determining the true value of the company… However, I made some basic assumptions for FB, and came to the following evaluation:
Taking Next Year’s Projected Earnings of 16.09 into account
A growth rate of 20% for the next 5 years
And a perpetual growth rate of 9% after that (below half its current and medium term growth rate)
We arrive at a current share price value of $453, with an annual return of 15% a year & a 25% margin of safety.
In conclusion, Facebook provides an undervalued alternative to all other companies on the market in relation to its growth rates & earnings valuation - a strong moat, long-term, predictable cash flows & should drive strong returns for years to come.
By: Mateo Gjinali
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