Should you buy Facebook now?
Opdateret: 3. maj
If you have seen my portfolio, you would have noticed that I do not currently own any of the FAANG stocks. In this series I will go through them all. F stands for Facebook, and this is my first analysis of the FAANG stocks.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
I think that most people know that Facebook is a social media and social networking service. Besides their flagship Facebook, Inc. they also own a bunch of other companies such as Instagram (photo and video-sharing app), WhatsApp (mobile messenger service), Oculus VR (virtual reality technology company), Onavo (mobile web analytics) and Beluga (messaging service) plus a bunch more. I do not want to go too much into details with the company, as it is so well known. Nevertheless, we do have to determine if the company has a moat. I do actually think that Facebook have two moats. The first one is a brand moat, as consumers enlarge trust the brand, and especially Facebook, Instagram and WhatsApp are widely used around the world, which leads us directly to the second moat being the switching moat. The aforementioned companies are such a big part of consumers life, as it is hardly worth to switch, if there should come some competitors at the same scale. We will go through the big five numbers later in order to determine how strong the moat is but let us just go through the management first.
Their CEO is Mark Zuckerberg, which is also the founder of Facebook. Besides being the CEO, Chairman and Founder of Facebook, he is also the biggest shareholder as he owns 29,3% of Facebook's Class A shares . Mark Zuckerberg is in many ways a controversial figure and there are many opinions about him, one thing that cannot be disputed though is that he has a brilliant mind. He founded Facebook when he was just 19 years old and now 15 years later it is a multi billion business. I do not want to go through his whole tenure as a CEO but some of the highlights are that he has been named person of the year by Time Magazine, been responsible for the biggest tech IPO in history at the time (2012), he is committed to philanthropic causes and he is not afraid to spend money on acquisitions (Instagram $1 billion, Oculus $2 billion and WhatsApp $19 billion). He does have a high approval rating as a CEO, and as always, I like when a founder is a CEO, as they are usually more committed to growing their business than their wallet (not that Mark Zuckerberg needs to be concerned about that). If you look at the results of Facebook, I believe that you can certainly determine that in Mark Zuckerberg, Facebook does have a great CEO.
We have determined that Facebook not only has one but two moats. We really do like the management as well. Now let us look into the big five numbers in order to see if Facebook does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We would like to see the ROIC be above 10 % in each of the benchmark and increasing. Looking at the numbers of Facebook they do exactly that. A ROIC like this, is exactly what you would like to see in a company that you are considering investing in.
The next numbers we will look into are the Sales Growth Rates. As we can see the Sales Growth Rate is well above 10 % in all of the benchmarks. Ideally, we would like to see the numbers increasing instead of decreasing but if you have a sales growth rate of more than 20 % in each of the benchmarks, I don't believe there is anything to worry about.
The next numbers are the EPS Growth Rates. Once again Facebook delivers fantastic numbers. Way above the required 10 % and while EPS growth rate hasn't necessarily increased in each benchmark it is way above the requirements, and there are much to be happy about if you invest or considering investing in Facebook.
Let us look into the Equity Growth Rates now. It is the same pattern that we have seen in the previous two growth rates. Above the requirement in all of the benchmarks but not necessarily increasing from benchmark to benchmark. However, when looking in the greater picture, it is certainly something you should be excited about.
Finally we look into the Cash Growth Rates. This growth rate differentiate a bit from the others, as the last benchmark doesn't live up to the requirement. In general it isn't something you should be worried about if one benchmark in any of the growth rates doesn't live up to the requirements and it is certainly nothing you should worry about in a company with numbers such as Facebook.
To shortly summarize the five numbers from Facebook. All numbers in all benchmarks except on live up to the requirement. Looking at the most important number, which is the ROIC, you see that it is also following the pattern we like, as it is increasing from benchmark to benchmark. The sales growth rate, EPS growth rate and equity growth rate do not increase from benchmark to benchmark but the numbers are still fantastic, and there are nothing to worry about, when looking at these numbers. The one outlier is the cash growth rate that has one benchmark, where it doesn't live up to the requirement. However, it is nothing to be worried about. Especially not in combination with all of the other numbers.
Normally we do also look into debt and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Looking at Facebook's debt we can see that Facebook has no debt at all. It is of course a very good thing and is yet another reason to be positive about investing in Facebook.
There are some risk with Facebook and I will go through some of them here. The first obvious risk is that we see a year like 2019 again, where they faced numerous investigations and scandals. Last year Mark Zuckerberg has faced the House of Representatives' antitrust committee together with CEO's from other big tech companies, and it doesn't stop here. It seems like they will be under investigation by Bureau of Competition and the Office of Policy Planning would also like to evaluate Facebook's market dominance, however these might not amount to anything. We could see further regulations with Biden as president, as he and the Democrats previously been critical to big tech, and are currently in power in both the House and the Senate. In 2020 we also saw several companies pausing their advertising on Facebook due to "The Stop Hate for Profit campaign" and these things might happen again in the future.
Now we have most of the numbers in order to calculate a price for Facebook. In order to calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here but we have a current EPS of 10.23, Estimated future EPS growth rate of 15 (It is the highest future growth rate that I use), Estimated future PE 30 (in this case we multiply the predicted growth rate with two, as this is lower than the historical highest P/E) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in my strategy we come up with the sticker price (some call it fair value or intrinsic value) of $306,90 and we want to have a margin of safety on 50 %, so we will divide it by 2 meaning that we want to buy Facebook at price of $153,45 (or lower obviously).
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 38.747 The Capital Expenditures was 15.115. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 10.580,5 in our further calculations. The Tax Provision was 4.034. We have 2.400 outstanding shares. Hence, the calculation will be like this: (38.747 - 10.580,5 + 4.034) / 2.400 x 10 = $134,17 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 9,57 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $151,07.
Facebook has a strong moat and a great management. All of the numbers look fantastic and live up to the requirements and look very solid overall. There are some risks concerning Facebook, and it is still to be seen how it will turn out. However, their management has previously been able to guide Facebook through troubled times. Nevertheless, the antitrust allegations is something that you need to keep monitoring if you are investing in Facebook. Based on my analysis I like Facebook a lot but as with all my other investments, I want to have a margin of safety before I open a position. I doubt that Facebook will ever drop to any of my calculated buy prices but it goes without saying that if it should drop to my Margin of Safety price of $153,45, I would definitely open a larger position. If you are happy with less of a margin a safety, I wouldn't blame you, as Facebook looks to be a solid investment. However, at the current valuations of $325, I'm not going to buy Facebook.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.
I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.
Some of the greatest investors in the world believe in karma, and in order to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to Four Paws. They do a lot of great things for animals such as rescuing the world's loneliest elephant from a zoo in Pakistan and moved it to an elephant sanctuary in Cambodia. If you enjoyed my analysis and want some good karma, I hope that you will donate a little to Four Paws here. Even a little will do a huge difference for the animals around the world. Thank you.