Originally published in partnership with INO.com
Facebook (FB), Instagram, Messenger and WhatsApp are ubiquitous in this digital age of social, mobile and cloud dominance. Facebook and it properties have dominate the social media landscape posting robust growth in all metrics pertaining to user growth, engagement and monetizing of such metrics, the latter more specifically in the last 3-5 years. Facebook’s earnings growth has been tremendous and has accelerated over the past 4 years. EPS has increased from $0.02 at the end of 2012 to $3.56 at the end of 2016, posting a ~17,500% rise over that time period. For a large capitalization company such as Facebook, this growth is very impressive. Judging by the previous 4 quarters, and more specifically its Q1 2017 quarterly results, this growth doesn’t appear to be slowing down anytime soon while steamrolling rivals such as Snapchat (SNAP) in its path of growth (Figure 1). Facebook’s Q1 numbers continue to impress, posting revenue and EPS growth of 49% and 73%, respectively. Facebook doesn’t show any signs of letting up and makes acquisitions to drive the business now with Instagram and WhatsApp and into the future of virtual reality with Oculus. Factoring in its projected growth with tech comparators such as Google (GOOG), Netflix (NFLX) and Amazon (AMZN), I’m predicting that Facebook with hit $175 by the end of the year with a lower P/E ratio than any of the aforementioned stocks. If Facebook hits the $175 mark, the stock will still be cheap on a relative basis. My prediction suggests an 18% upside from current levels.
Figure 1 – Facebook’s Q1 2017 results posting revenue and EPS growth of 49% and 73%, respectively
Gangbuster Revenue and EPS Growth:
Facebook has been on fire from a whole growth perspective when measured via revenue, EPS and free cash flow over the past 4 years (Figure 2). Revenue has grown 54.7%, 58.4%, 43.8% and 54.2% on an annual basis for 2013, 2014, 2015 and 2016, respectively. Aggregate revenue climbed from $5.1 billion to $27.6 billion or 440% during this 4 year timeframe. EPS has witnessed tremendous growth as well growing 3,000%, 81%, 17% and 172% on an annual basis for 2013, 2014, 2015 and 2016, respectively. Aggregate EPS climbed from $0.02 to $3.56 or 17,700% during this 4 year timeframe (Figure 2). Free cash flow has followed in lock-step rising 223%, 59%, 41% and 49% on an annual basis for 2013, 2014, 2015 and 2016, respectively. Aggregate free cash flow climbed from $1.070 billion to $11.617 billion or 986% during this 4 year timeframe (Figure 3). Facebook appears to be continuing this trend based on its Q1 2017 results posting double digit growth across all these metrics (Figure 1).
Figure 2 – Facebook’s year end growth numbers from 2013 through 2016
Figure 3 – Facebook’s cash flow growth from 2013 through 2016
Collectively, Facebook and its properties have witnessed a virtual monopoly in the social media space. Recently, Snapchat was identified as a major player in the social media landscape and direct threat to Facebook and its properties. Snapchat posted robust growth into 2016 up until the launch of direct competitor Instagram Stories. In August, the launch of Instagram’s clone of Snapchat’s Stories coincided with a substantial decrease in Snapchat’s growth. Instagram launched its Stories to a user base of 300 million daily active users and 500 million active users each month. By October, Instagram Stories had 100 million daily users while Snapchat’s growth came in at just 7% in Q3 2016 to reach 153 million daily users. Snapchat’s growth was even worse in Q4, posting a 3.2% growth rate in the backdrop of Instagram Stories reaching 150 million daily users, just shy of Snapchat’s total number (Figure 4). It’s clear that Facebook has outcompeted Snapchat at its own game while potentially arresting any future growth. I think Snapchat was the most legitimate potential competitor in the social media space and now it’s clear that Facebook retains the title of the go-to platform for users and advertisers.
Figure 4 – Introduction of Instagram Stories and Snapchat’s near stunted growth
$175 Year End Target:
Facebook trades at ~$148 per share at the time of this writing which implies a P/E ratio of 37.0. This P/E ratio is higher than the average stock however one must pay more for the growth. Facebook has a PEG ratio (P/E ratio divided by growth rate) of 1.48 suggesting an annual growth rate of 25% in EPS. Typically any value less than 1.5 is a good indicator that stock is attractive if the growth is robust. EPS the end of 2016 was $3.56 thus factoring in a 25% premium we arrive at $4.45. However, Facebook surprises to the upside by an average of 16.5% over the previous 4 quarters (Figure 5). Factoring in the 16.5% premium this translates into a $1.04 increase or $4.60 EPS for 2017. Assuming Facebook continues to trade at a P/E of ~40, this translates into a stock price of $184 per share. I think Facebook could post earnings of $5.00 per share this year so this may be conservative. Currently, similar high growth technology companies such as Google, Amazon and Netflix currently have P/E ratios of 32, 180 and 207 and PEG ratios of 1.70, 6.59 and 3.43, respectively. These metrics are suggesting growth rates for Google, Amazon and Netflix of 18.8%, 27.3% and 60.3%, respectively. Facebook’s projected growth is greater than Google’s and just shy of Amazon’s yet has a P/E ratio in-line with Google’s and a fraction of Amazon’s. On a relative basis Facebook is inexpensive as compared to other large growth tech companies.
Figure 5 – Facebook’s previous 4 quarters and the resulting upside beat on an EPS basis
Facebook and its properties are clearly the go-to social media platform for both users and advertisers. Facebook has been on fire from a whole growth perspective when measured by revenue, EPS and free cash flow over the past 4 years. Aggregate revenue climbed from $5.1 billion to $27.6 billion or 440% while EPS climbed from $0.02 to $3.56 or 17,700% and free cash flow climbed from $1.070 billion to $11.617 billion or 986%. Facebook appears to be continuing this trend based on its Q1 2017 results posting double digit growth across all these metrics. Any competitive threats from the likes of Snapchat have been put to rest in my opinion with Instagram Stories not only arresting Snapchat’s growth but eclipsing Snapchat’s daily active users for the apples to apples Stories comparison. Assuming Facebook continues to trade at a P/E of ~40, this translates into a stock price of $184 per share by year end. Currently, similar high growth technology companies such as Google, Amazon and Netflix have projected growth rates of 18.8%, 27.3% and 60.3%, respectively. Facebook’s projected growth is greater than Google’s and just shy of Amazon’s yet has a P/E ratio in-line with Google’s and a fraction of Amazon’s. On a relative basis Facebook is inexpensive as compared to these other large growth tech companies and I feel Facebook will easily reach $175 by year end.
Disclosure: The author holds shares of Facebook and is long Facebook. The author may sell a secured put position. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com a venue created to share investing ideas and strategies with an emphasis on options trading.