As Free Cash Flow Continues Rolling, So Will Facebook Stock

Acquisitions and increase in ARPU support Facebook stock in the long term

A businesses’ valuation depends on its ability to generate cash flows on a sustained basis. Even for early-stage companies, valuation largely depends on expected cash flows. Facebook (NASDAQ:FB) is a money-spinner and as cash flows swell, I expect Facebook stock to continue trending higher.

As Free Cash Flow Continues Rolling, So Will Facebook Stock
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Facebook has been on an uptrend in the last one year with an upside of 47% during this period. This rally has been backed by fundamental factors than market sentiment and these factors will continue to take the stock higher.

Facebook reported FCF of $5.5 billion in 2014. Free cash flow has swelled to $15.4 billion for 2018. Considering the FCF for the first nine months of 2019, Facebook is on track to report FCF of $21.0 billion for the year.

With 2.87 billion diluted shares outstanding, Facebook is likely to report free cash flow of $7.30 per share for 2019. Further, with $52.3 billion in cash & equivalents as of September 2019, the balance sheet cash per share stands at $18.2.

As free cash flows grow at a healthy pace, Facebook is certainly attractive and a long-term money-spinner. I must add that Facebook has still not paid dividends, but it can be a stock re-rating factor in the future.

Acquisitions Can Drive Growth

In the last few years, Facebook has acquired 72 companies. With $52.3 billion in cash & equivalents, Facebook is likely to remain aggressive on the acquisition front.

It was recently reported that Facebook was the firm bidding against Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) to acquire Fitbit (NYSE:FIT). This is an indication of the point that the company is looking to utilize the cash to pursue inorganic growth.

The key point is that Facebook can acquire upcoming technology, which can serve as a long-term game-changer.

As an example, Facebook acquired Oculus Virtual Reality in 2014. The virtual reality in gaming and entertainment market is expected to grow at a CAGR of 40.1% from 2019 to 2026. By 2026, the market size is expected at $70.57 billion. The 2014 acquisition gives Facebook an early mover advantage. Oculus is on an expansion mode with the recent announcement to acquire the studio behind hit virtual reality game “Beat Saber.”

More Upside in Average Revenue Per User

For Facebook, the key revenue and cash flow driver is advertising revenues. It is likely to remain the main source of cash flow in the coming years.

With steady growth in daily active users, the company’s total revenue from advertising is likely to trend higher. In addition, it is worth noting that the company’s ARPU from the U.S. and Canada for 3Q19 was $34.55. However, the global ARPU is $7.26 and the ARPU from Asia Pacific is only $3.24.

As advertising increasingly shifts to mobile devices, it is likely that the ARPU in Asia Pacific will trend higher. I am focusing on Asia Pacific because it has the highest number of daily active users. The encouraging point is that ARPU from Asia Pacific was $2.67 in 3Q18 and has increased to $3.24 in 3Q19. As the ARPU increases, the free cash flow will also increase.

Another revenue growth trigger can be WhatsApp. It has still not been monetized and with the launch of WhatsApp Business App, Facebook might be moving towards monetizing its biggest acquisition. While numbers might be insignificant as a percentage of total profit, WhatsApp Business App is already profitable in India.

My Final Thoughts on Facebook Stock

Facebook will continue to generate higher free cash flow in the coming years and that will take Facebook stock higher. The company’s cash glut is likely to be utilized for inorganic growth, share repurchases and possible dividends.

Further, with the launch of Facebook Pay, the company is moving towards being more diversified. The company is also making inroads in the hardware business with a focus on video calling and augmented reality.

With these growth triggers and sustained increase in ARPU, Facebook stock is well-positioned to be a long-term value creator. The current uptrend for Facebook stock is therefore likely to sustain.

As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.

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