All eyes will be on Facebook (NASDAQ:FB) at the end of the month when it reports its Q4 earnings and cash flow. I want to update you on my model on Facebook stock from my article in November after their last earnings. My estimate is that it is worth at least 31% more or $352.96 compared to its price on Jan. 4 ($268.94).
Analysts expect Facebook will make $3.15 per share in earnings for the quarter ending Dec. 31. Moreover, their estimates for 2021 have fallen a bit since my last article from $10.40 to $10.18 per share.
As a result, my model for Facebook stock has fallen from $371.84 per share to $352.967. But never mind, since this is still almost one-third higher than today’s price. That is a great ROI for most investors.
What Facebook Is Worth
My model for Facebook is based on two metrics. The first is its free cash flow yield (i.e., free cash flow divided by its market capitalization). I compare the free cash flow (FCF) yield to its peers and use that metric to value Facebook’s forecast FCF. The second model is based on its historical price-to-earnings (P/E) ratio.
First, I used a 3.1% FCF yield and used this to value Facebook’s FCF. I previously argued that Facebook’s valuation should be higher due to its FCF margins. I wrote it should have a similar FCF yield as Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), at 3.1%, since it has similar FCF margins.
How do I estimate the FCF? I took the FCF margin based on sales.
For example, Facebook had a 27.7% FCF margin based on its sales in Q3. Sales for 2021 are now forecast to be $103.89 billion, according to Seeking Alpha. This is slightly higher than before. As a result, the FCF margin of 27.7% brings the FCF margin estimate to $28.8 billion.
Therefore, using a 3.1% FCF yield, we can foretell or estimate that Facebook stock will have a $929.03 billion market capitalization. That represents a 19.4% gain over its present market cap of $778.04 billion. Therefore Facebook stock is worth $321.11 per share using this model.
The second model is based on Morningstar’s estimate that Facebook has had an average P/E of 38.7 over the past 5 years. This is slightly lower than in November I wrote that the average was 41 times earnings.
Therefore, we multiply 38.7 times the $10.18 EPS (see above) forecast for 2021. This results in a target price of $384.80 per share. This assumes that the “reversion to the mean” theory of stock valuation works out over time.
What To Do With Facebook Stock
So now we have two model estimates for Facebook. One is $321.11, based on its FCF yield.
The other is $384.80 based on historical P/E multiples for Facebook. The average of both is $352.96 per share, slightly lower than my previous estimate of $371.84 for Facebook stock.
However, this target price is still 31% higher than today. An ROI of almost one-third, if it occurs this year, is a great return for most investors.
Not that we care, but many analysts on the sell-side see a much higher price for Facebook stock as well. For example, Yahoo! Finance says that 46 analysts have an average target of $321.15, whereas Marketbeat.com says the average of 44 analysts is $296.66. However, TipRanks.com says 35 analysts who have written up FB stock in the last months have an average target of $322.66.
Therefore the average of $313.49 per share is 16.6% above today’s price of $268.94 (Jan. 4). But these guys are too conservative for me. My estimate is $352.96, 31% higher.
And after all, Facebook stock rose 33% over the past year to Jan. 4. Therefore, with similar growth prospects, I suspect that my target price will be more likely to occur.
Sell-side analysts are always too concerned about getting out of range of their fellow analysts. They don’t want to be seen as an outlier analyst. I don’t care about this and neither should you. Sometimes having a simple model is better than a more complicated one.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
