Facebook (NASDAQ:FB) stock has been on a roll. So far this year FB stock is up 26.5% as of July 9 when it closed at $350.42, up by $77.26 from its close of $273.16 on Dec. 31. This is close to my original target price of $374.53 that I forecast on Feb. 9 (up from $352.56 in my Jan. 7 article). But the key to these forecasts is Facebook’s strong free cash flow (FCF) performance.
Now, based on Facebook’s surging FCF, I predict FB stock will cross over $500 per share. My new target is $511 based on analysts’ revenue estimates for 2022 and the company’s extremely high FCF margins. This represents a potential gain of 45.89% for investors in FB stock. It will also give the company a market value of over $1.43 trillion compared to its market capitalization of $980 million today.
Basically, the company is gushing cash with a significant portion of its advertising revenue flowing straight to the bottom line as free cash flow. We can use its FCF margins and FCF yield to value FB stock. Here is how.
Estimating Facebook’s FCF
During Q1 Facebook produced $7.97 billion in free cash flow. This is seen on page 11 of its 10-Q filing where it shows that the company produced $12.242 billion in cash flow from operations (CFFO). After deducting $4.272 in capex spending, the FCF figure is $7.97 billion. This is down from $9.22 billion in FCF during Q4, but it is still higher over the trailing 12 months (TTM).
For example, Seeking Alpha shows that the TTM FCF for Facebook was $24.159 billion (i.e., $39.988 billion in CFFO – $15.829 billion in capital expenditure). This was 2.2% higher than the $23.632 billion in TTM FCF from Q4 2020. The point is that its FCF is growing.
More importantly, Facebook’s FCF also represents a high portion of its revenue. For example, TTM revenue from Q1 was $94.399 billion, according to Seeking Alpha. That means that its FCF margin over the last year was 25.59% ($24.159 billion / $94.399 billion).
Now we can use this 25.59% margin number to estimate its future FCF. For example, analysts forecast that revenue in 2022 will be $137.73 billion. Therefore, applying the 25.59% margin to that figure will mean that FCF will hit $35.245 billion. This is 45.89% higher than the TTM FCF of $24.159 billion as of Q1. We can now use that FCF estimate to value FB stock.
Estimating Facebook’s Value
The easiest way to estimate the value of FB stock is to divide the estimated FCF by its present FCF yield. Here is how that works. First, note that the TTM FCF of $24.159 billion represents 2.465% of its $980.08 billion market capitalization (as of July 9). So its FCF yield to investors is 2.465%.
Next, we can take its forecast FCF of $35.245 billion next year and divide it by this FCF yield. So, $35.245 divided by 2.465% brings a target market cap of $1.4298 trillion. This represents a potential gain of 45.89% over its market cap today of $980.08 billion.
In other words, FB stock is worth $511.22 (1.4589 x $350.42). What we have done is forecast the value for FB stock using its historical TTM FCF margin against analysts’ forecast for 2022 revenue. Now if the company’s FCF margins rise over this period and if the FCF yield improves as a result (i.e., drops below 2.465%), FB stock could move even higher.
For example, let’s say that FCF margins rise to 27% from 25.6% and if, as a result, the FCF yield improves to 2.20%. Here is what would happen. FCF would hit $37.187 billion (0.27 x $137.73 billion). And using a 2.2% FCF yield, the target value would be $1.69 trillion ($37.187 billion / 2.2%). This is 72.4% higher than its current value, and FB stock would rise to $604.12.
So, you can see that just a small change in its FCF margins and FCF yield can have huge effects on FB stock.
What To Do With FB Stock
This is the same methodology I used in my Jan. and Feb. articles, and it definitely seems to be working. So I suspect that its chances going forward are just as good.
As you might suspect, Wall Street analysts are not as ebullient on FB stock as I am. For example, 48 analysts surveyed by the data service that Yahoo! Finance uses predict a 12-month target price of $386.47. One of the best analyst survey sites is TipRanks. It surveys analysts who have written on the stock in the last 3 months. Their report is that 34 analysts have an average target price of $390.47, up 11.4% from today’s price.
Given that these same analysts did not predict the 26.5% gain in FB stock so far this year, I think it is probably better to use my method. Look for FB stock to rise 46% to $511.22 sometime over the next year.
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.