If there’s one thing I’ve learned watching Facebook’s (NASDAQ:FB) journey since Facebook stock was first listed in May 2012 is that investors are very good at compartmentalizing.
While Mark Zuckerberg’s public persona might be irritating and Facebook’s lack of concern for user privacy downright offensive, investors can look past this and follow the money.
The Cambridge Analytica data scandal broke on March 17, 2018. Since that time, Facebook stock has managed to eke out a 5% gain. And although that sounds terrible, the FB stock price traded as low as $123 as recently as the end of last year.
For anyone who bought FB stock at last December’s lows, you’re sitting on gains of almost 60%. How’s that for perspective?
The reality, as I stated in July, is that Facebook is a great stock but a terrible company, and by terrible, I don’t mean it hasn’t been friendly to shareholders who’ve been there since the beginning. I mean, it won’t make many ESG-focused portfolios.
Facebook shareholders continue to be okay with that. As Al Davis, the late owner of the Oakland Raiders, used to say, “Just win baby!”
Facebook continues to do that.
With that in mind, I’ve got three things even the most jaded investor can’t help but like about the company.
1. Workspace and Facebook Stock
I recently discussed the idea of Facebook spinning off its Workplace business communications platform, which, despite its 3 million users, appears to be getting lost in the company’s valuation.
My rationale for splitting it off was that it’s already operated entirely separate from Facebook. The parent doesn’t have access to its data. That means companies are far less reluctant to use the platform. And, because its usability is excellent much like Facebook itself, it will continue to grow the number of users.
Ultimately, it could be a serious competitor to Slack (NYSE:WORK). Perhaps it already is.
However, because fintech is so hot these days, Facebook Pay and Libra, the company’s stab at cryptocurrencies, seem to be the major storylines followed by investors at this time.
Eventually, Workplace will get its due, and when that happens, investors will be standing around wondering how it happened.
And that’s right before your very eyes.
2. Free Cash Flow
Anytime a company has $52.3 billion in cash, cash equivalents, and marketable securities; there’s a good chance it generates significant free cash flow. Facebook is no exception.
In the first nine months of fiscal 2019, Facebook had free cash flow of $15.8 billion, 31.7% higher than a year earlier. On a margin basis, its free cash flow was 31.9% of revenue, 110 basis points higher than in the same period a year ago.
Remember, free cash flow is the excess capital a company doesn’t need to keep a business operating. That can be used for dividends, share repurchases, debt repayment, acquisitions, and new business creation.
In the first nine months of 2019, Facebook repurchased $2.9 billion of its stock. In the same period last year, it bought back $9.4 billion, more than three times the amount.
Interestingly, in 2018, when it faced a couple of low points in April and December, it was buying back its stock with both hands.
All told, Facebook bought back $12.9 billion of its stock in 2018 at an average share price of $167.63, providing the company with a 16.0% return on its investment, far more than it could have got in the bank.
3. It Has Zero Debt
Of all the FAANG’s, Facebook is the only company that doesn’t have a lick of debt. When the economy slows, Facebook shareholders will be thankful Mark Zuckerberg avoided leverage of any kind.
FAANG Total Debt for the Trailing 12 Months
| Company | Free Cash Flow (TTM) |
Total Debt (TTM) |
Multiple |
| $19.6B | $9.1B* | 2.2x | |
| Apple (NASDAQ:AAPL) | $58.9B | $108.1B | 0.5x |
| Amazon (NASDAQ:AMZN) | $20.1B | $59.5B | 0.3x |
| Netflix (NASDAQ:NFLX) | -$2.9B | $12.4B | -0.2x |
| Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) | $28.1B | $13.8B | 2.0x |
Although Facebook doesn’t have any loans outstanding, it does have $9.1 billion in operating lease liabilities, both current and non-current. These are the lease payments due under leasing agreements at its various offices, data centers, etc. I’ve chosen to include them in the calculation to make it a fair comparison.
I think you can see that in terms of the least leverage, Facebook and Alphabet are the two FAANGs leading the way.
For me, although I’m not a fan of the company’s treatment of some of its employees, from a financial perspective, it’s hard not to like how it handles its leverage and free cash flow.
Facebook’s capital allocation is second to none.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
