Never would I have imagined that a dominant advertising company that’s still growing users would trade at the following numbers (as of 17th Nov 2022 market close) :
Market Cap : $295b
Revenue (TTM) : $118b
Net Income : $28.8b
Operating Cash Flow : $54b
Free Cash Flow : $26.4b
Even in today’s high inflationary environment, one can make the argument that Facebook is really cheap.
Now, one can argue that Facebook deserves to be priced this way. It’s no longer a growth story and is a company in decline - besieged on all sides by rivals like TikTok, Apple & Google. The headlines are certainly not short on these narratives.
However, the facts appear to be far from the myths about Facebook being a company in decline. Ben Thompson has a lovely piece about this. I highly recommend reading it.
META/FACEBOOK - Value Trap?
Perhaps.
If you believe it is a company in decline, then you can argue that Facebook is fairly priced today. Perhaps even expensive if you factor in a 3% annual decline in revenue and earnings.
But what if it isn’t? How would you price Facebook assuming it grows 5% and buys back stock?
Backing our Capex, Cleaning up Earnings, Reducing Headcount = Even Cheaper
Now let’s assume Facebook / Meta doesn’t get any less productive after firing 11,000 people. Let’s assume each of those 11,000 people earn an average of $100k annually, saving the business $1.1b in expenses that drop to the bottom line.
Let’s make a 2nd assumption - the metaverse capex is a temporary distraction and it needs to be added back : Worth $10b
Here’s what the numbers look like :
Net Income : $39.8b
Operating Cash Flow : $55b
Free Cash Flow : $37.4b
If you simply clean up the earnings by considering the job firings (there’s a human cost to this which I empatise with), Facebook/META is trading at :
7.4x Net Income
5.36x Operating Cash Flow
7.8x Free Cash Flow
Assuming the company grows these modestly, one can argue that you’d simply earn a return that equals that growth rate. For example, a modest 4% growth on all metrics will yield a 4% CAGR assuming no buy backs & no multiple rerates.
However, if Facebook reaccelerates growth after this slowdown, one can argue that that chances of a meaningful rerating of multiples will be in order.
I will let you decide if this is acceptable risk-reward for you. Personally, I find it compelling.
Note : I am not a financial advisor and this is my personal portfolio. Do not blindly follow and do your due diligence. You can lose money by investing in the stock market. All my writing is opinion and NOT advice.
I have been wrong on some firms. Peloton for example didn’t grow as intended and management tore through the balance sheet with little discipline. This is par for the course in investing. You win some, you lose some. Had you blindly followed my work on Peloton, you’d have lost over 80% of your capital. Proceed with caution.