Is Facebook Stock a Good Buy for the Long Term?

With the recent news of Facebook’s plan to operate their own digital currency and the US anti-trust probes, let us zoom further into opportunities and risk of Nasdaq-listed Facebook (NASDAQ: FB)

Company Background

Sourced from Socialmediahunt

Founded on February 4, 2004, Facebook has grown over the years to become a social media juggernaut and owns many flagship brands under its arsenal with the more popular ones below:

  • Facebook
  • Whatsapp
  • Instagram
  • Messenger
  • Oculus

Today, Facebook hires approximately 37,700 full-time employees as of March 31, 2019 and established its foothold in international offices and data centers all across the globe.

And here’s one amazing fact: there are 2.38 billion monthly active users on Facebook and there are around 7.7 billion people in the world – which means that around 1 in 3 people uses Facebook all over the world!

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

With Facebook’s IPO on May 2012, we will extract the figures for year 2013 to be a more accurate base.

Facebook has scored astounding growth in its revenue and profit over the past 5 years. Revenue surged 700% from US$7.87 billion in year 2013 to US$55.84 billion in year 2018. During the same period, net profits after tax also skyrocketed 920% to US$25.36 billion.

Worth mentioning is its impressive earnings margin of 33.17% which is a testament of its competitive advantage. The earnings margin has always stayed above 15% as well.

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

Facebook’s cashflow position also takes a similar stance - growing by leaps and bounds and going from a negative cash balance in Dec 2013 to US$11.08 billion cash hoard in 12M Mar 2019.

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

Zooming into its financial ratios, we can see that its PE ratio (denoted by the blue line) has come down significantly mainly due to the leap in its earnings as previously mentioned. Its P/E ratio currently stands at 24.6x.

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

Next up, we check out Facebook’s ROE - a measure of management's ability to generate income from the equity available to it. From around an ROE of 10%, the company managed to grow the ratio to 26.28% in Dec 2018.

ROEs of 15-20% are generally considered good and this means that Facebook has done an exceptional job when it comes to this area.

Analyst Consensus Estimates

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

Employing the Analyst Consensus Tool, we can see that 48 analysts from all over the world have covered Facebook and the average consensus recommendation comes up to be "Buy" based on a consensus rating* of 1.21.

*The Consensus Rating is calculated based on the average of all recommendations using the following scale:

Buy: 1 Overweight: 1.5 Hold: 2 Underweight: 2.5 Sell: 3

Following that, their mean target price is US$222.17, which translates to a 22.5% upside based on its share price of US$181.33 at the time of writing.

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

Next up, analyst coverage of Facebook is generally positive over the past 2 years as we see very few “Sell or Underweight” ratings based on the chart above.

This consensus estimates do seem to be useful when it comes to identifying gaps between the company’s share price versus the target price. During Apr’2018 and Jan’2019 where the potential upside increases to more than 30%, the company’s share price subsequently rebounded in the next few months.

Peer Comparison

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

In this section, we will do a peer comparison of Facebook with the other top technology giants listed under the acronym called “FAANG”. The acronym is coined by CNBC’s Jim Cramer in 2013 to discuss about Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Alphabet (GOOG). It was subsequently adjusted to include Apple (AAPL) afterwards.

As of 17Jun2019 | Sourced from ShareInvestor’s WebPro

By using the ShareInvestor’s Stocks Comparison feature, we can place the different counters side by side (up to 10!) to do a quick comparison of their financials.

One can easily glance through the various financial ratios such as revenue growth, return on equity, earnings margin, total asset turnover and more.

Let’s take for example – Gross Profit margins and Net Debt to Equity ratios. We can see that Facebook has the highest gross margins at 82.6%, trouncing all its competitors although the others also sport enticing margins of at least 37%.

Next, Facebook’s possesses a pristine net cash balance sheet, similar to Alphabet’s Google. Amazon and Apple comes close at 0.22 and 0.30 respectively. Lastly, Netflix’s net debt to equity stands at 1.22x and probably requires deeper monitoring due to a high debt burden compared to the rest.

Facebook’s Move into Cryptocurrency with Libra

Facebook announced on 18 June that it is going to create a new digital currency called Libra. The evolution of the Libra Blockchain will be overseen by the Libra Association together with 27 other global organisations - an independent not-for-profit body headquartered in Geneva, Switzerland.

In Libra’s white paper, the Libra Association basically paints it as a “simple global currency and financial infrastructure that empowers billions of people”. You can check out the cryptocurrency’s whitepaper here.

For those new to digital currencies, a company who wants to be listed in the public markets require an IPO prospectus whereas the creation of a new cryptocurrency entails a whitepaper (a more loose form of the prospectus).

How Libra will look like in a phone | Image credit from Facebook Newsroom

But the real question is: “how does the cryptocurrency benefits Facebook”?

According to Techcrunch’s video which seeks to demystify Libra, Facebook will stand to benefit in 3 major ways:

  1. If the adoption of Libra grows to a phenomenal scale and people deposits their money into the e-wallet and app called Calibra, Facebook and the members of the Association will get to earn interest from the massive reserves.
  2. Given that Facebook’s own Calibra wallet that will be built into WhatsApp, Messenger; it will lead to more e-commerce happening within the 2 platforms and more small businesses will then want to buy more ads on the platform.
  3. Lastly, Libra will enable Facebook to serve the 1.7 billion unbanked population, which means that Facebook is ever going to expand into the untapped market and become an integral part of their daily lives.

In a nutshell, the Libra cryptocurrency shows a lot of promise provided it can take off in a big way. That said, it is already hitting some roadblocks due to European regulators voicing out concerns that Libra could rival central banks and become a systemic risk to the global financial system.

Happy investing!

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