Facebook (FB)

Facebook (FB)

Summary:  ON SALE

Score:  20/20

MOS:  72%

Share Price:  $358

Sticker Price:  $$1,273

Is Facebook stock a good buy?

Facebook is a technology company founded in 2004 and based out of Menlo Park, CA.

The company was originally named TheFacebook by founders Mark Zuckerberg, Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, and Chris Hughes, roommates and students at Harvard. They eventually changed the name to Facebook in 2005 and acquired the domain facebook.com for $200K.

Their first investment came from Peter Thiel in 2005 where he invested $500,0001 for 10.2% share in the company. Thiel co-founded PayPal and Palantir. His VC firm has invested in other businesses including Stripe, airbnb, Spacex, Spotify, TWilio, lyft, asana, oculus, and more. 

Facebook originally launched to colleges and universities to create scarcity. Harvard was the first, followed by Stanford, Columbia, and Yale. By late 2004, they already reached their one millionth user. By late 2005, the company had 2,000 colleges and 25,000 high schools throughout the US, Canada, Mexico, UK, Australia, New Zealand, and Ireland. On September 26th, 2006, Facebook opened up to everyone with the restriction that you have to be 13 years old or older.

In 2007, Facebook launched Facebook Ads, the revenue engine that has helped turn the social network into a highly profitable global enterprise.

The company originally went public on February 1st, 2012 at about $38 per share. The share price eventually went down to $22 per share by September and finally broke out past $40 in August of 2013. This shows that even popular tech stock IPOs can have a very slow start. By October of 2015 the stock finally broke out past $100 per share and hasn’t slowed down since. As of today, this stock has a total return of 842% and an annualized return of 28%.

Facebook generates primarily all of its revenue through advertising. Those of you who know me, know that I love both B2C and B2B SaaS (Software as a Service). Recurring revenue with no supply chain or inventory costs. Highly scalable and highly lucrative. There are two other business models that I consider to be ever more scalable.

1) Transaction fees: Businesses like PayPal, Square, and Adyen charge small fees for every transaction. The fees are low friction meaning they are rarely contended. In other words, most people pay the fees without making a fuss or asking for fees to be removed. The more transactions consumers make, the more money these companies generate. Although SaaS is a set monthly or yearly fee, transaction fees have no limit. The transactions can keep growing with no end in sight.

2) Advertising: Google and Facebook generate significant revenue through advertising. Similar to the transaction fee business model, there is no limit to the amount of money businesses will spend to place their ads in front of consumers. And, the more businesses compete for ad space, the higher the ad costs. The challenge is, creating a platform with a massive audience like Google or Facebook is extremely difficult.

Although advertising is the primary revenue generator, Facebook has acquired other business models that either enhance or expand the social network itself or diversify to other revenue channels.

Here is a list of Facebook’s acquisitions.

  • 2009 – FriendFeed – A social media platform and news aggregator.
  • 2010 – Octazen Solutions – A Malaysian contact-importing startup.
  • 2010 – Divvyshot – A photo-sharing platform.
  • 2012 – Instagram – A photo-sharing platform.
  • 2013 – Storylane – A blog-sharing platform.
  • 2013 – Onavo – An Israeli analytics company
  • 2014 – WhatsApp – An instant messaging application
  • 2014 – Oculus – A VR (virtual reality) company
  • 2020 – Acquired 9.9% share in Jio – A Indian telecommunications company

Here is the latest news.

This article from benzinga.com states that Facebook, China Mobile, and MTN Group are building a wider than planned giant sub-sea cable in Asia and Africa. This cable will aim to tap the growing demand of fast data transfers for streaming movies, social messaging, and telemedicine. This article from fool.com echoes these statements but expands by saying Facebook and Google are working together to create a 7,500-mile-long underwater cable system in Asia-Pacific which will serve the growing demand for 5G in Japan, Taiwan, Guam, the Philippines, Indonesia, and Singapore.

This article from fool.com states that Facebook is on it’s way to $500 per share. The company did report a year-over-year revenue increase of 56% and an EPS increase of 101%. The company does mention that Twitter and Snap are growing faster but likely won’t impact ad spend.

This article from databox.com states that audiences on Facebook engage with ads more than Google and Facebook is a more cost efficient advertising platform. In other words, if a business wants to generate more revenue through advertising, Facebook is the better play. 

This article from investorplace.com states that the acquisition of Oculus has been a long term strategy and that strategy is coming together as planned. Oculus will be used to make affordable VR hardware and the first big product that’s coming to life is a smart glasses partnership with Rayban. We should expect to see the glasses go-to-market this year.

This article from cnbc.com states the FTC (Federal Trade Commission) may have a second chance to prove to federal judge James Boasberg that Facebook has illegally maintained a monopoly. The judge threw out the FTC’s initial complaint, saying it didn’t do enough to show that Facebook illegally maintains monopoly power to warrant moving the case forward. But, he left the FTC an opportunity to make a stronger case in a new filing. The FTC claimed Facebook holds monopoly power in the personal social networking, or PSN, category. That definition excluded platforms used for streaming video, including YouTube, and professional social network / job searching site LinkedIn, or the fitness social network Strava. The FTC claimed Facebook’s share of that market is more than 60%. Boasberg took issue with the lack of clarity at how the FTC arrived at the 60% figure, saying it was “too speculative and conclusory to go forward.”

In 2018, Mark Zuckerberg testified before the US Congress. He apologized for Facebook’s fake news, hate speech, and lack of data privacy during the 2016 election. At this time, Zuckerberg did tell US senators the company is going through a philosophical shift and argued that the company is not a monopoly, stating that consumers don’t exclusively use Facebook as their only social media platform. Most consumers use other social platforms to engage, browse, and communicate. These activities begane in July of 2018 where the share price was at $207. By December the share price had dropped to $144, a 30% decline. By July of 2019, the share price was back up to $200 and didn’t break out past $220 until January of 2020, just before Covid-19. In other words, a legal issue held this stock down for over a year. If the FTC keeps pushing, we could see more turmoil like this again which may trigger a stockpiling event. Stay tuned.

Now let’s take a look at the 4 M’s.

MOS: The financials are almost as good as you can get. The score is 20/20 which shows the financial statements are extremely healthy. This proves how lucrative and financially efficient this business truly is. With a MOS of 72%, there is definitely upside potential for Facebook.

Meaning: Creating a popular social network is very difficult. Getting people to try a new app is one thing but getting people to stay for years is an incredible feat. Facebook has proven to create a powerful social network that is now nearly 20 years old. With the social networking platforms comes a highly targeted and lucrative advertising revenue model. Facebook has also been making strategic acquisitions and investments that expand its global reach. The platform is on its way to remain in business the next 10 years but the threat from the FTC continues. This is worth paying attention to.

Moat: The FTC is claiming that Facebook is a monopoly. Here is how Facebook compares to other social networks.

  • Facebook: 2.89 billion users
  • TikTok: 1.1 billion users
  • LinkedIn: 740 million users
  • Snapchat: 293 million users
  • Twitter: 199 million users
  • Strava: 76 million users

Based on these numbers, I believe the FTC will have an even more difficult time convincing the US federal judge that Facebook is a monopoly. In fact, Facebook should be thankful for the rapid growth of TikTok which is the first non-Facebook app to reach 3 billion installs. This quickly shows the monopoly acquisition may not be valid.

TikTok is owned by ByteDance which is a tech company based out of Beijing, China. ByteDance is currently a private business with estimated revenues of $34B in 2020 compared to Facebook’s $85B the same year.

To compare the demographics…

Facebook

  • Ages 13 – 17 = 2.9%
  • Ages 18 – 24 = 18%
  • Ages 25 – 34 = 25%
  • Ages 35 – 44 = 18%
  • Ages 45 – 54 = 14%
  • Ages 55 – 64 = 11%
  • Ages 65+ = 11%

TikTok

  • Ages 10 – 19 = 33%
  • Ages 20 – 29 = 30%
  • Ages 30 – 39 = 16%
  • Ages 40 – 49 = 14%
  • Ages 50+ = 7%

TikTok definitely serves a much younger audience and in most cases attracts different advertisers. This is a good sign for Facebook because it means TikTok may not take a lot of advertising revenue away from Facebook.

Management: Mark Zuckerberg has certainly helped build a powerful tech business but he was never alone on this journey. His co-founders (Eduardo Saverin, Andrew McCollum, Dustin Moskovitz, and Chris Hughes) deserve credit for fast growth in the beginning years. Chris Cox, who joined in 2005, built the Facebook News Feed. Adam D’Angelo helped build the ad targeting infrastructure. Dave Morin helped create Facebook Connect. Sheryl Sandberg left Google in 2008 to join Facebook as COO. She is a big reason why Facebook is as profitable as it is today.

I do have to point out that Chamath Palihapitiya, a former executive at Facebook, has stated that social media is ripping society apart. He actually feels tremendous guilt for what he helped create. For those of you who have seen the Netflix documentary, The Social Dilemma, you can see how social media is negatively impacting society. This is worth a watch.

It’s also important to note that Sheryl Sandberg has faced criticism for her role in handling Facebook’s public relations after revelations of Russian interference in the 2016 United States elections and its Cambridge Analytica data scandal. In fact, Zuckerberg publicly blamed Sandberg for the outcome of the Cambridge Analytica scandal. 

With management, Facebook has both good and bad. Yes, they have attracted some extremely bright minds that have helped build this company but the pressure from the FTC has triggered poor management qualities. Sandberg could have certainly handled public relations better and Zuckerberg publicling blaming her is a bad leadership play. When things go south, a good leader will place blame upon themselves and not cast it upon others.

For those of you who have seen the show Game of Thrones, there is one scene of many that shows the profound wisdom of Tywin Lannister. After the arrogant Joffrey was poisoned to death, Tommen became the new king. Tommen, being young and naïve, as well as unsure what steps to take next, was tactfully counselled by Tywin. Tywin educated him on the differences between a good king and a bad king. One of the final lines in this scene is “A wise king listens to his counselors and heeds their advice until he comes of age. And the wisest kings continue to listen to them long afterwards.” 

The point is, a good leader must rely on the board of directors especially when the FTC continues to apply unwanted pressures on the company. Zuckerburg has to strategically position the right people on the board to improve trust with both the public and private sectors. Pay close attention to who is assigned to that board in the coming months and years.

Now let’s take a look at the financials. A good value investor should be able to read the income statement, cash flow statement, and balance sheet and within 60 seconds have a pretty good idea of how the business is performing.

 

Revenue (Found on the Income Statement)

2017:  $40B

2018:  $55B

2019:  $70B

2020:  $85B

Revenue is increasing consistently which is a great sign.

 

Net Income (Found on the Income Statement)

2017:  $15B

2018:  $22B

2019:  $18B

2020:  $29B

Net Income increased substantially in 2020 which is a great sign.

 

EPS (Found on the Income Statement)

2017:  5.49

2018:  7.65

2019:  6.48

2020:  10.23

EPS increased substantially in 2020. Very impressive.

 

Free Cash Flow (Found on the Cash Flow Statement)

2017:  $17B

2018:  $15B

2019:  $21B

2020:  $23B

Free Cash Flow has slightly increased which is a great sign.

 

Total Assets (Found on the Balance Sheet)

2017:  $84B

2018:  $97B

2019:  $133B

2020:  $159B

Total Assets have increased consistently which is a great sign.

 

Total Liabilities (Found on the Balance Sheet)

2017:  $10B

2018:  $13B

2019:  $32B

2020:  $31B

Total Liabilities have slightly decreased in 2020 which is a good sign. We like to see liabilities and debt decrease.

 

Total Debt (Found on the Balance Sheet)

2017:  $0

2018:  $500M

2019:  $10B

2020:  $10B

Total Debt has increased. This might be due to the investment in Jio. 

 

Total Equity (Found on the Balance Sheet)

2017:  $74B

2018:  $84B

2019:  $101B

2020:  $128B

Total Equity has increased consistently. Another great sign.

 

Facebook’s financials are outstanding. You can’t get much better. The advertising machine they’ve built is the best in the world. Although the financials look great, there are two issues to pay attention to. The pressure from the FTC is one and leadership is the other. 

If Facebook is brought to court again, we could see the share price drop which will trigger a stockpiling event. That may be a great time to buy. We would also like to see the right people assigned to the board, if they haven’t been already. Now is the time to diversify between public-sector-friendly and private-sector-friendly board members. A strategic move like such can improve Facebook’s trust.

This is a perfect example of a great stock but when legal issues arise, caution should be applied before making an investment. It may be wise to see what happens with the FTC but if you do invest now, maybe limit your weighted allocation.

The Summary, Score, and MOS of this stock may have changed since the posting of this review. Please login to Tykr to see up-to-date information.

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