Analysts' Choice: Facebook Is A Club Worth Joining

4/3/2017


  Recent Price
$143
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
34
  Shares (millions)
2,938
  Long-Term Debt As % Of Capital
0%
  52-Week Price Range
$142.65 - $106.31

Woody Allen once said, "I'd never want to belong to any club that would have someone like me for a member." But even the comedian made an exception for Facebook ($143; FB). His official page has 1.8 million followers.

Members of Facebook, the largest social network in the world, use the site and its various applications an average of 50 minutes a day, up 25% from 2014, exchanging messages, posting photos, and viewing videos. Part of Facebook's appeal rests in the so-called network effect, where an increasing membership enhances the value for all users, resulting in a positive feedback loop. Facebook's massive scale marks a huge advantage for maintaining market share.

Earning a Quadrix Value rank of 32, the stock isn't cheap. But we believe the shares merit a premium, given Facebook's highly attractive market position and growth prospects. The stock is a Long-Term Buy.

Business breakdown

Facebook has 1.2 billion active daily users, up 18% from a year ago. For advertisers, that means a huge audience to tap and an irresistible opportunity to tailor marketing messages to specific groups, aligned by similar interests. Facebook says advertising revenue per user jumped 31% to $4.83 in the December quarter. Advertising, which makes up 97% of Facebook's revenue, grew 57% last year.

U.S. spending on digital advertising is forecasted to climb 16% this year to $83 billion, estimates industry researcher eMarketer. Facebook's digital ad sales are projected to rise 32% in the U.S., pushing its market share to 20%. Alphabet ($850; GOOGL) is projected to take a leading 41% share.

Facebook generates a prodigious amount of cash. Last year operating cash flow surged 87%, while free cash flow jumped 91%. The balance sheet contains $29.45 billion of cash and zero debt, translating to net cash of $10 per share, up 59% from a year ago.

Management has made several high-profile acquisitions over the past five years, including WhatsApp (mobile messenger) for $19 billion, Oculus VR (virtual-reality glasses) for $2.3 billion, and Instagram (photo-sharing application) for $821 million. Management launched a $6 billion share-repurchase program earlier this year to help offset dilution from acquisitions and employee stock grants. The buyback plan has no expiration date.

Conclusion

Facebook's trailing P/E ratio is a lofty 34 (or 31 excluding net cash), well above the median of 25 for S&P 1500 internet stocks, but looks more reasonable relative to projected growth. Shares fetch 26 times estimated 2017 earnings (or 24 excluding cash), in line with the industry median.

Facebook is expected to increase per-share profits 29% over the next 12 months, more than any other company in its industry, projected to deliver average growth of 4%. Unlike most other internet stocks, Facebook's profit estimates are rising. Investors have grown accustomed to Facebook topping expectations. It has delivered positive surprises in each of the past 13 quarters for per-share profits and in 12 of 13 quarters for revenue.

An annual report for Facebook is available at 1601 Willow Road, Menlo Park, CA 94025; (650) 543-4800; investor.fb.com.

FACEBOOK
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '16
1.41
vs.
0.79
51%
133.50
-
113.55
37 - 31
Sep '16
1.09
vs.
0.57
56%
135.60
-
108.23
44 - 35
Jun '16
0.97
vs.
0.50
59%
121.08
-
104.40
46 - 40
Mar '16
0.77
vs.
0.42
52%
117.59
-
89.37
52 - 39
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
27.64
4.23
0.00
135.60
-
89.37
32 - 21
2015
17.93
2.28
0.00
110.65
-
72.00
49 - 32
2014
12.47
1.77
0.00
82.17
-
51.85
46 - 29
2013
7.87
0.93
0.00
58.58
-
22.67
63 - 24
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
87
99
32
100
90
72
72

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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