Living in Chicago, I rely on the EL Train for transportation. People always have their heads down and hands 10 inches from their eyes. One of my favorite field studies is to quickly glance at their phone screen to see what app they’re using. More often than not, Facebook or Instagram (an often overlooked piece of Zuck’s business) is their preferred choice.
Strengths & Opportunities:
-No. 1 in mobile advertising: For Q3 2015, mobile advertising revenue was $3.4B vs. $985M a year ago (245% YOY increase), while total advertising revenue was $4.3B vs. $2.9B in that period.
-Diverse user base across multiple product platforms:
-Financially strong: Despite an increase in costs from a year earlier, their earnings have grown. This signals that revenue is a huge driver of earnings, whereas many companies rely solely on cost cutting measures to support EPS and cash flow.
-Highly intelligent and focused company leadership: Zuckerberg has been there from the start, and has not deviated course. Sandberg is a powerhouse inside and outside of Silicon Valley.
-China opening up access to the site to its 350M internet users(as alluded Fly alluded to in prior post); also, there are around 500M active users in neighboring Asian nations. Additional emerging markets in Latin America and Africa offer compelling growth opportunities.
-Developing or purchasing a robust video platform that would allow it compete with either YouTube and/or Meerkat or Periscope.
Weaknesses & Threats:
-Perception of not being “the coolest” social media site.
-Privacy concerns will always persist.
-Tremendously competitive environment for mobile add network, particularly Google developing a stronger presence.
-Twitter getting their shit together.
Price Target: It’s difficult to value Facebook based on traditional metrics such as EV multiples (my preferred method), P/E ratios or DCFs for a variety of reasons, among them being the lack of similar competitors and difficulty of projecting future cash flows. When this happens, a unique yet supportable, approach is needed.
I decided to base their valuation on monthly average users. After a little research and quick calculations on recent public and private (Snapchat & Pinterest) valuation figures, I settled on $100 being a reasonable equity value per user metric.
Based on the graphic above, I considered Facebook’s user base to consist of all four networks, not just Facebook itself. I applied $100 to Facebook and WhatsApp; $70 for Messenger; and $120 to Instagram (premium based on prospects of higher user growth). Additionally, I kept Oculus VR at $2B, the purchase price. After dividing this by shares outstanding, I came up with a price of $152. Keep in mind, they have minimal debt.
Conclusion: Despite the massive user base, Facebook still has additional growth opportunities as an individual site and entire company. Instagram, in particular, still has plenty of room to expand; just wait until all those Millennials have kids, if they decide to. Potential expansion in China is too big to ignore, and video is still an immature industry that will dominate faster than you’ll expect, sort of like Facebook has.
Disclosure: I’ve been long $FB in both IRAs and actively managed brokerage accounts for a while now, and will not sell unless story drastically changes.
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