The Value Case for Facebook
When it rains, it pours.
That is how Facebook founder Mark Zuckerberg must feel after suffering two black swans in two days.
First came the disclosures that a client, Cambridge Analytica, used the information from 50 million Facebook users to help the Russians influence the 2016 presidential election.
Today, we learned that the company is being investigated by the Federal Trade Commission for failure to keep customer information private.
As a result, the company has lost all of its 2018 year-to-date stock performance, and is now taking a big bite out of 2017.
The question now arises, what should you do about all of this as the educated investor?
Facebook is one of the most widely owned companies in the world, right after Apple (AAPL). It often is the largest single position of many major institutional investors. And there isn't one that isn't salivating at adding to its position at fire-sale prices.
For the first time in ages, Facebook is now selling at a screaming discount to the main market, with a PE multiple of only 16.5X at today's low, compared to 19X, and 14.5X if you strip out cash on the balance sheet. Facebook has in effect become another Apple (AAPL) in valuation terms.
Fundamentals have not changed. Some 66% of advertisers say they will increase their spend over the next year.
Regulatory fear is overdone, and it is difficult to imagine in what form that such regulation would take. What, an (FB) friend tax on your account? I would go broke.
If anything, more regulation could be a net positive for (FB), as it creates a deeper moat with which it can protect and grow its business. For more depth on this topic please read today's issue of the Mad Hedge Technology Letter.
The barriers to entry for new competitors, already huge, are about to become insurmountable.
The worst case is that founder Mark Zuckerberg may have to undergo an unpleasant appearance in front of the technophobes in congress.
The company is growing at a compound 30% annual rate and is far and away the dominant player in a deeply moated space. In other words, it is still a company whose shares you should die for.
We'll know for sure when the company gives its Q1, 2018 earnings report after the market close on May 2.
In Q4, 2017 it announced an earnings per share of $2.21, a beat of 26% over analyst expectations. Revenues rose by an eye-popping 47.2% to $12.97 billion for the quarter YOY, a beat of $420 million.
Full year 2017 free cash flow came to $17 billion. Q4 operating income came to $7.4 billion representing a 53% profit margin.
Some 89% of the company's ad revenues came through mobile phones.
There are now 2.1 billion people using Facebook, and 1.1 billion on a daily basis. Some 700 million come to the site daily to buy and sell things through Facebook market.
Its WhatsApp subsidiary has 1.5 billion users who transmit 60 billion messages a day.
Its Oculus Rift entry in the virtual reality gaming space, to which my own kids are hopelessly addicted, is the front-runner in the field.
You might want to wait for the smoke to clear and the dust to settle. However, right here right now at $162 a share it would be perfect for your long-term "buy and forget" portfolio, not only for you and your kids, but for your grandkids as well.
I'm Willing to Bet on the Zuk