I don’t consider myself to be a growth stock investor. I do own growth stocks in a long-term diversified portfolio, but they tend to be GARP (growth at a reasonable price) stocks. So when companies like Facebook Inc (NASDAQ:FB) come up for analysis, I get suspicious and annoyed at the same time.
That’s because I don’t like Facebook the company, but it’s hard not to like Facebook stock.
I do like Facebook’s product, and have met many wonderful people through it and maintained great relationships. I do not like the political leanings of the company, and that’s because companies should not get involved in politics, a subject I discussed in this article. The idea that Facebook stock could be affected by a stupid political move by its management is always a danger.
I also don’t like that FB will start identifying “fake news.” Free speech is free speech.
However, it is difficult to argue with Facebook stock, which is but 10% off its all-time high. At yet, it may not be unreasonably priced.
Using Statista, we can get a sense of what the monthly active user data looks like for Facebook stock, since that’s a very important metric in regards to growth. North American growth has been relatively stable for some time. Back in 2010, growth was running 5.9% from quarter to quarter, and roughly 24% year-over-year.
However, North American growth is now rising at about 1.7% QTQ and less than 4% YOY. The numbers are still impressive on a worldwide examination, in which we find 1.179 billion daily active users, a 4.7% increase QTQ and a 17% YOY increase.
What is particularly notable about Facebook stock is the extent to which it has captured market share in terms of advertising for social network platforms. That number is 70.6% for this year and is expected to decline by about 90 basis points next year, but is also down from 72.2% in 2014.
It has also proven to be a very effective advertising platform, with revenue from each user globally increasing at a rate of almost 40%. That’s just incredible. If you crunch all the other data, I see nothing but good news, as we see increasing user engagement and increasing advertiser spend per user. Advertisers like what they see in the FB audience and their ability to generate revenue from them.
However, total advertising revenue was $3.077 billion in Q2, up a whopping 68% from Q2 of 2015. Payments and other fees have been stagnant at around $135 million for almost four years.
So while I am not fond of Facebook stock earning virtually all its revenue from advertising, since the ad market could blow up in a recession, for now, there’s nothing but clear skies.
Facebook Stock Valuation
So what about Facebook stock as an investment? Let’s look at valuation.
Facebook stock has about $26 billion in cash and short-term investments (vs. no debt) for some $11 per share. Thus, I consider Facebook stock of having a net effective price of $107 per share, or a market cap of $317 billion. $7.5 billion of TTM net income means that FB stock is trading at a rather lofty valuation of 42x earnings. However, with net income exploding — likely to exceed 100% growth this year — 42x seems cheap on a TTM basis.
Analysts see 35% annualized net income growth over the next five years. That’s an impressive number. Because I am willing to value FB stock at that growth rate, plus a 10% premium for cash on hand, free cash flow, and brand name, I’d even grant it a 46x multiple.
Trading at 42x, then, means I classify this as a Growth at a Reasonable Price stock.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, he has no position in FB. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.