- The growth rate of Facebook users is slowing, but this is more than offset by the growth in monetization.
- In terms of its current financial results, the company's price seems fairly balanced and the potential for further growth is clearly present.
- In the context of the current growth rate of key financial indicators, Facebook deserves higher multiples.
- Facebook's DCF-based price target offers a ~ 100% advantage.
- Regulatory risk will continue to grow. The Chinese government's attempts to tighten control over tech companies is a concentrated global trend
Facebook (FB: US) remains the dominant global social network with a rather ambiguous future. For one thing, the company is fundamentally undervalued. On the other hand, signs of hitting the quantitative growth cap and specific risks are forcing investors to distrust Facebook.
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The key characteristic of a company is its growth dynamics. Not the growth itself is striking, but its dynamics. In other words, it is vitally important to know whether the company is speeding up or slowing down.
Starting to discuss this topic, in a broad context, it is worth noting that Facebook and Instagram remain one of the most popular online platforms among American adults:
source: pewresearch.org, survey of US adults conducted, Feb'21.
Also, those who are now 18 are interested in Facebook no less than those who are now 50:
source: pewresearch.org, survey of US adults conducted, Feb'21.
World statistics are probably not very different from this one. The growth of any company can always be divided into quantitative and qualitative. In the case of Facebook, the quantitative growth lies in the growth of its active audience. Quality growth is reflected in monetization. And here we can highlight certain trends.
The coronavirus pandemic has given new impetus to social media audience growth in the United States and Canada. At the same time, the last quarter's result was clearly below trend. It seems that the dynamics of the indicator is gradually returning to the previous logarithmic trend:
source: Visualizedanalytics.com
As a result, total revenue in this segment continues to grow exponentially, and the last quarter's result turned out to be better than trend:
source: VisualizedAnalytics.com
In Europe, we see roughly the same picture in relation to the number of active users. Active audience growth reverts to pre-coronavirus trend, but in revenue per user, growth remains exponential:
source: VisualizedAnalytics.com
Market capitalization vs financial results
Let's look at Facebook assuming that its capitalization is a function in which the independent variable is the company's income. Despite this simplification, according to a linear model, the company's market price is now fairly balanced and, based on average analyst expectations, will continue to rise in the coming quarters:
source: VisualizedAnalytics.com
In terms of its current financial results, the company's price seems fairly balanced and the potential for further growth is clearly present.
Multiples vs growth
As a general rule, there is a direct relationship between the growth rate of the company's financial indicators and the level of their multiples. This is due to the fact that during periods when the company grows the fastest, investors are willing to pay higher multiples. And vice versa.
Having considered the relationship between Facebook's revenue growth rate and its P / S multiple, it should also be recognized that the current ratio of the multiple is in the "cheap" zone. Based on average analyst expectations, within the limits of this model, Facebook's balanced price per share in Q4 2021 will be around $ 530:
source: VisualizedAnalytics.com
Cash flow discount valuation
When predicting Facebook's revenue for the next ten years, average analyst expectations are the most reasonable source. According to consensus forecasts, in the next decade, the company's annual revenue will exceed $ 330 billion, demonstrating a CAGR of 14.6%.
Facebook's operating margin has hovered around 40% in the last seven years. But the model is based on the assumption that the operating margin over the next 10 years will gradually decrease to 36% in the final year. This is a standard approach based on the likely increase in competition.
source: YCharts.com
Risks
Facebook is associated with three key risks: (1) hitting the growth cap, (2) regulatory risk, and (3) market risk.
So far there are only signs of a quantitative slowdown in the company's growth, which is offset by the acceleration of qualitative growth. We will have to wait for the next quarter.
Regulatory risk will continue to grow. The Chinese government's attempts to tighten control over tech companies are a concentrated global trend. This entire Cambridge Analytica story will serve as a reminder to governments of all countries of the power of data. Therefore, the state control will definitely be strengthened and most likely this will negatively affect the growth of the company.
In the context of market risk, the entire US stock market has now reached extreme points in many respects. First of all, this refers to the relative size of the market: the Wilshire 5000 Index (Warren Buffett Index) is now twice the GDP of the US.
source: VisualizedAnalytics.com
Second, home prices are growing suspiciously fast in the United States. It seems that investors are no longer expecting high returns from the stock market and are therefore switching to the real estate market.
Technical analysis
The whole story of Facebook's stock price growth is well described by the exponential trend that appears as a straight line on the chart with a logarithmic y-axis.
source: xStation
Since mid-2020, the real price of Facebook shares has been fluctuating along this trend. It means that the capitalization of the company is growing according to its natural long-term trend.
Darío García, EFA
XTB Spain
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