Facebook (NASDAQ:FB) reported absolutely stellar free cash flow (FCF) numbers for the second quarter, ending June. As a result, I believe that FB stock is worth significantly more than its present price.
As a result, I have upped my price target to $517 from $500, which I previously wrote about earlier this month. This article will discuss how I came up with this new target price, based on its Q2 earnings release.
The bottom line is that FB stock is now worth 44.2% more than its present price. That works out to $516.70, compared to its price today of $358.32 (July 29).
Figuring Out Facebook’s Future Free Cash Flow
Facebook’s FCF for Q2 was $8.511 billion and $16.331 billion for the six months ending June. This can be seen on page 9 of its earnings release. More importantly, as can also be seen on that page, this FCF represents 29.5% of its $55.248 billion in revenue for the half-year. We can use that to project out its FCF going forward.
Here is how. First, we will use Seeking Alpha‘s average analysts’ revenue projections for 2022. Analysts now estimate that 2022 revenue will be $140.59 billion in 2022. This is higher than the prior analyst forecast of $137.73 billion. Most likely analysts have increased their estimates based on the excellent earnings that were recently released for Q2.
Next, we multiply the 29.5% FCF margin by $140.59 billion. This means that the forecast FCF for 2022 is $41.47 billion. We can use that figure to value Facebook stock.
Estimating Facebook’s Value
One way to do this is to divide the company’s forecast FCF by its FCF yield. For example, as I pointed out in my previous article, the trailing-12-months (TTM) FCF yield is about 2.5%.
Using the same methodology as in my last article, the TTM FCF last quarter was $32.172 billion. This represents 3.167% of its $1.016 trillion market valuation. So the average of these two FCF yield estimates is 2.83%.
Next, we divide the FCF estimate for 2022 of $41.47 billion by 2.83%. That provides us a target market value for Facebook. This works out to $1,465.37 billion (i.e., $1.465 trillion). That is 44.2% higher.
This means that FB stock is worth 44.2% more than its price today of $358.32, giving FB stock a target price of $516.70.
What To Do With FB Stock
So there you have it. FB stock is now worth about $517 per share or about $1.465 trillion. This is even higher than my previous target price of $511.22. The reason is that Facebook’s future revenue and free cash flow estimates have risen.
This is based on its stellar Q2 results. In other words, advertisers love Facebook. They are pouring more money into selling goods and services through their social network. I don’t see that trend slowing down anytime soon. Expect to see Facebook consistently growing its free cash flow, and hence its inherent stock price value.
Long-term value investors can take advantage of any weakness in FB stock to average into the stock. The point is that given the 44% upside in FB stock as it stands, any weakness in the price now should be taken advantage of. Given the consistency of the company’s results, this may not occur very often.
Therefore, it probably makes sense to take an initial position in the stock now.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.