The cash machine that is Facebook, Inc. (NASDAQ:FB) is pretty phenomenal. FB stock is driven by the fact that is has grown to become the world’s largest digital billboard. I personally do not understand why advertisers throw so much money at FB, because as a user, my brain just blots out the ads.
Obviously, however, advertisers are seeing some good ROI or they wouldn’t be doing it. I have my doubts about a few things, which I’ll mention, but in perusing the data, things look pretty great.
Here are the amazing metrics first:
Daily active users (DAUs) in Q4 reached 1.4 billion, up 14%. This number represents approximately 66% of Facebook’s 2.13 billion monthly active users (MAUs) in Q4. MAUs increased 269 million or 14%.
Full-year 2017 revenue grew 47% to over $40 billion, along with $17 billion of free cash flow. Q4 revenue was $13 billion, up 44%. Q4 total ad revenue was $12.8 billion, up 48%. Mobile ad revenue was $11.4 billion, up 57%.
Speaking of ads, it is incredible to me that the average price per ad increased 43%. That’s just crazy and goes to what I was saying: clearly advertisers not only must be seeing ROI they like, but ROI they love.
Facebook carries $41.6 billion in cash and no debt, meaning the business itself trades at 30x net income of $16 billion earned in 2017.
Looking at analyst estimates, the numbers are pretty impressive. FY17 came in at $6.62 per share, which beat the street. FY18 may take a hit as FB stock management aims to improve the experience.
It wants to tackle fake news and extremist postings. The consensus is for $7.16 per share, which would only be an 8% increase, which I expect will be beaten.
Building off that, however, 2019 is expected to come in at $9.03 per share, a 26% increase. After that, analysts see $10.54 in 2020, a 17% increase in earnings. Finally, 2021 is pegged at $12.60 per share, up 20%.
What does that mean as far as buying FB stock now? The stock is at $180 per share, with about $18 per share in cash and no debt. If five year annualized estimates for growth average out to about 20%, and I give a 10% premium each for cash flow, cash on hand, and brand name, then a 26x PE is reasonable.
However, for genuine growth stocks like FB stock, I permit a PEG ratio of up to 2.0. FB stock has a PEG ratio of 1.2.
Given the volatility of the market, I would prefer to see slightly lower prices, maybe $160 to buy in.
What are the risks to Facebook stock? Fake users. I think what Zuckerberg may have been talking about as far as rooting out fake news and extremists included trying to zap the bots. In the 10-K, FB admits:
“…there are inherent challenges in measuring usage of our products across large online and mobile populations around the world … In 2016, we estimate that “duplicate” accounts (an account that a user maintains in addition to his or her principal account) may have represented approximately 6% of our worldwide MAUs … we estimate user-misclassified and undesirable accounts may have represented approximately 1% of our worldwide MAUs.”
So we know the numbers aren’t totally accurate. The big risk to FB stock if the number of users truly turn out to be way off base, or even fraudulent. Other social media companies have admitted to shortfalls in tracking these bots and fake accounts.
Such a revelation might scare away advertisers. Might. Otherwise, it seems like clear sailing for Facebook stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.