They think it’s a service or a collection of services. Facebook is the world’s free communication system. Facebook does everything AT&T (NYSE:T) once promised to do, and it does it all for free.
What’s more, Facebook has done more to open the world and bring new people to the global economy than any company ever. Rather than celebrate this success, intellectuals seem intent on destroying it. Otherwise the company would be worth even more.
The March to a Trillion
I wrote in January that it was time to buy Facebook stock. Since then, FB stock is up 35.5%, quadrupling the gain of the average Nasdaq stock.
At $352 per share (down from its intraday high of $355) it’s worth $987 billion. That’s about 10 times this year’s expected $94 billion in revenue but just 30 times earnings. By way of comparison, Microsoft (NASDAQ:MSFT), worth $2.04 trillion, sells for 37 times earnings.
Facebook is worth the price because it brings about one-third of its revenue to the net income line. It continues to grow at 18% per year, at scale. At the end of March, it had nearly $65 billion of cash and short-term investments in the bank. Long-term debt was $11 billion. Free cash flow during the most recent quarter came to almost $8 billion. This was true even after putting nearly $4.3 billion into capital investment.
The Secret Sauce
It’s capital investment that’s Facebook’s secret sauce. No company is doing as many different things to bring the world together as Facebook.
Facebook now has 15 data centers: 10 in the U.S., four in Europe and one in Singapore. It has its own network of fiber cables, which it sells as a “middle mile” to other companies. It’s building a fiber cable around Africa. Furthermore, it recently announced two new cables between North America and Singapore.
This was made possible by Facebook’s free services and ad network, which supplied the necessary cash flow. But it was also made possible by CEO Mark Zuckerberg’s decision to commit to the cloud a decade ago, and by Facebook engineering. Facebook sponsors the Open Compute Project to drive down cloud costs and the Telecom Infra Project meant to cut networking costs.
These are open-source projects, open to all. Other companies can do exactly what Facebook is doing. AT&T can copy Facebook. They don’t have to reinvent anything.
For decades, AT&T promised Americans universal broadband. It took billions of dollars in government subsidy based on this promise. It also broke itself with debts that, in March, were over $150 billion.
Facebook has never taken a government subsidy. It has enough cash to clear all its debt. Yet it has done everything AT&T once promised to do, and on a global basis.
Guess which company American policymakers now favor? AT&T. This, despite the fact that AT&T is lobbying against proposals to subsidize fiber to homes. Pro-AT&T writers insist it’s Facebook that’s subsidized, not AT&T. This is because Section 230 of the Communications Act holds it harmless from speech made on its network, just as it did on AT&T phone calls for decades.
The Bottom Line on FB Stock
The only threat to Facebook’s growth is government.
Facebook isn’t software so much as it is hardware and networking. Its software lets it offer communication to the world, free, all paid for with cash. It’s capital spending, not some nefarious plot, that made Facebook a trillionaire.
On the date of publication, Dana Blankenhorn held LONG positions in FB, and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.