I don’t care how great Snap Inc (NYSE:SNAP) technology is. I don’t care how exciting the Snapchat IPO is. You’re an investor, and investing in publicly traded companies is all about earnings. To that end, Facebook Inc (NASDAQ:FB) has earnings in spades, and Snapchat doesn’t. It really is that simple.
Forget the hype that’s Snapchat and buy FB stock instead.
In the worst-case scenario, you miss out on a huge IPO, but you make money just the same because Facebook is a free cash flow machine. It always has been, and it probably always will be.
Snapchat vs. Faceboook
Not many people can forget the debacle that was Facebook’s 2012 IPO. In the summer of 2012, you could have owned FB stock for the bargain-basement price of $17.55. If you were lucky enough to have bought anywhere near Facebook’s all-time low, today you’d be sitting on quite a stash — slightly more than $78,000 from a $10,000 bet.
Now, consider Facebook’s financial situation at the time of its IPO in May 2012.
Facebook, in the span of three years, had grown revenues from $272 million to $3.7 billion at the end of 2011, five months prior to its IPO. On the bottom line, it grew net income from a loss of $56 million in 2008 to a profit of $1 billion in 2011 — a net margin of 27%. That’s higher than the 2017 net margin of roughly 90% of the S&P 500’s companies!
Today, Facebook’s net margin has swelled to 37%. Do you really believe Snapchat will have a 37% net margin by the end of 2022? I don’t think so.
The Snapchat IPO priced at $17 per share. It will raise almost $3.4 billion, and SNAP stock will be valued at almost $24 billion. By the way, in 2016, Snap Inc lost $514.6 million on $404.5 million in revenue.
While everyone seems to marvel at the fact Snap’s revenues grew by 589.1% in 2016, Facebook’s revenue increased by 88% in 2010, but from an already impressive revenue base of $2 billion. Oh, and it was earning $606 million at the time, or $1.1 billion more than Snapchat.
Does anyone even remember now that Facebook was valued at $104 billion based on a FB stock price of $38? I doubt it.
So, before you jump on the Snapchat bandwagon, you might want to consider the fact that Facebook was valued at 28 times sales when it went public while Snapchat is going out at 60 times sales — and I don’t need to remind you which is the profitable one again. This is a telling example of irrational exuberance seeping back into the markets.
Now, let’s get away from Snap and put the focus back on Facebook.
The Case for FB Stock
In 2016, Facebook generated $11.6 billion in free cash flow, an 11-fold increase from 2012, giving FB stock a 2.9% free cash flow yield. That might seem low until you compare it to Apple Inc. (NASDAQ:AAPL), the largest publicly traded company in the world. It has a free cash flow yield of 7.1%.
Your initial reaction (especially if you’re a value investor) might be to say that Apple stock is the better buy because you’re getting a yield that’s 2.5 times higher than Facebook.
But you’d be forgetting a very important part of the equation.
Since 2012, Apple has grown its free cash flow by 26.5%, or $11 billion, over the past four years. Facebook, as mentioned previously, grew free cash flow by 1,100%, or $11 billion, over the same period.
Put another way, Facebook’s free cash flow in 2012 was $1.1 billion, which was just 2.7% of Apple’s. Today, it’s 22% of Apple’s and rising. A few more quarters like Q4 2016 in which it increased free cash flow by 35.5% year-over-year to $3.7 billion, and it could reach 50% of Apple’s FCF within the next four years.
No, Facebook likely won’t ever catch Apple given the iPhone maker’s head start. But it certainly points out what FB stock might be worth if it were to come up with a moneymaker on par with its original social media app.
I doubt it will do that, but even then, that should be more than enough to make you forget about the Snapchat IPO for at least a little while.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.