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Why Facebook, Inc. May Change the World and Double Its Stock Price

##Symbol## FB

Facebook, Inc.
80.71 -0.82 (-1.01%)
Sector: Information Technology
Published by Capital Market Laboratories on 2015-06-15

What does the rating mean?
3-Month Stock Move: +3.8%
6-Month Stock Move: +5.2%
12-Month Stock Move: +25.6%
30-day Option Implied Volatility: 22.5%
Implied Stock Range: ($76.60, $84.90)
What does "implied stock" mean?

As of June 2015, the company has 1.44 billion monthly active users. I'll make an aggressively bullish argument for Facebook, Inc.'s future at the conclusion of this article that is based on FACT. The stock has the potential to double in a matter of years.

When Facebook first IPO’d, it and its founder (Mark Zuckerberg) were met with a crowded group of doubters that together raged into a giant cacophony. All the doubters were wrong as the company has grown to one of the largest in the world and Mark Zuckerberg has time and again proven to not only be right, but to be right on a massive scale and to have vision well beyond most analysts' capabilities.

However, Facebook quarterly (not annual) revenue and net income have declined for the first time in several years. The firm’s R&D expense per dollar of revenue has doubled, which has had a direct impact on operating margins, which in turn have declined substantially and consecutively for a year. For the time in a very long time, there are some questions about the firm’s potential for growth. That growth concern stems from another all-time first, a firm whose reach is so vast that it may be literally limited by the number of people on planet Earth.

Check out these numbers: FB already gets 2.5 million "shares" a minute, "WhatsApp" gets 347,000 photo shares a minute and Instagram gets 216,000 posts a minute (both are owned by Facebook). Here's a remarkable tweet from demographer Conrad Hacket:

Here are the earnings estimates for next quarter, relative to last quarter.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-22 $0.31 $4,001.6 M $4,001.8 M $3,543.0 M Provided by ZACKS

These are core fundamentals that are driving the Facebook 4.5 star rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 13,507 8,916 5,489

Operating Margin (QTR) 1.357 1.73 1.34 FALLING

Net Income (TTM US$ Millions) 2,810 1,923 67 RISING

Levered Free Cash Flow (TTM US$ Millions) 4,419 3,128 1,131 RISING

Research and Development (US$ Millions) 1,045 455 293 RISING

Research and Development Expense/Revenue 0.295 0.182 0.201 RISING

Stock Returns and Chart

FB is up +3.8% over the last three months and up +5.2% over the last six months. The stock price is up +25.6% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 13,5078,9165,489

Revenue (TTM) is trending higher and in fact has seen 14 consecutive quarters of trailing-twelve-month highs. FB is not only growing revenue by 51.49% year-over-year, but it's 4.5 fundamental (star) rating implies that the revenue acceleration is pushing the core fundamentals of the company forward. While massive revenue growth often times comes at the expense of earnings, free cash flow and operating margins, that is not at all the case for FB.

But, I do note, the quarterly revenue reported last quarter was the first time in a year that revenue went down and it's not entirely a cyclical phenomenon. That actually happened.

What do all these numbers mean?
FB's fundamental rating benefited these results:
1. The one-year change was positive.
2. The one-year change was greater than +20% (an extra boost to the rating).
3. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at revenue (TTM US$ Millions) in the bars and the quarterly number in the gold line in the chart below.

Click Here to Interact With This Chart

Revenue (TTM US$ Millions) Peer Chart

Let's look at Revenue (TTM) for FB versus its peers (TWTR, LNKD) in the chart below. This is probably the best chart to remind us that Facebook is totally in a league of its own with respect to social media.

Click Here to Interact With This Chart

Operating Revenues/Operating Expense 1.3571.731.34FALLING

Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. This is the hit that FB takes that makes it a 4.5 star company, rather than a five star. Note the down trend in operating margins. A year ago, FB was generating $1.73 for every dollar in operating expense. Today that number has fallen to $1.36. That is a true concern moving forward coupled with growth.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.73. In the last year we can see operating margins are decreasing but are greater than 1.0 for the most recent period.

FB's fundamental rating was affected from the operating margin numbers in two ways:
1. The current value is above 1.0 (the firm generates an operating profit).
2. The one-year change was negative (lowers the rating a little bit).

Let's look at Operating Revenues/Operating Expense in the chart below with the total assets in the orange line.

Click Here to Interact With This Chart

Net Income (TTM US$ Millions) 2,8101,92367RISING

Net income from a year ago is certainly rising. In fact it's nearly 50% higher. But FB net income has fallen from its all-time high two quarters ago in terms of trailing-twelve-month numbers and the company reported two consecutive quarterly down numbers. In the chart below we see the annual numbers in the bars and the quarterly number sin the gold line. This trend is a direct results of that operating margin number we were just looking at.

Click Here to Interact With This Chart

Levered Free Cash Flow (TTM US$ Millions) 4,4193,1281,131RISING

While revenue, net income and operating margins have taken a recent hit from their breakneck growth, it turns out the levered free cash flow (FCF) (TTM) continues to rise. In fact, for the latest twelve-month period, FB reported FCF of over $4.4 billion. That $4.4 billion is a massive 41% rise year-over-year. This is one of the most remarkable things about facebook. On one hand it's already a giant. On other other, it's still growing like a micro cap.

In this second to last time series chart we look at FCF (TTM) in the bars.

Click Here to Interact With This Chart

Research and Development (US$ Millions) 1,045455293RISING

Research and Development (R&D) (US$ Millions) has grown massively for Facebook from $57 million back in April of 2011, to now over $1 billion (yep those numbersd are right). Many companies lump stock based compensation into R&D (which is a travesty in terms of transparent accounting) which mucks up the numbers a bit, but in any case, we can see the firm is spending big time to innovate.

Year-over-year FB has seen R&D rise 130%, and over two-years it has risen nearly $260%.
. In fact, the only other really comparable companies are the two other social media giants, Twitter and LinkedIn.

In our final time series we look at R&D (raw number in $millions) in the blue bars and R&D per revenue in the gold line.

Click Here to Interact With This Chart

We've covered a lot here. Facebook revenue, net income and operating margins are actually headed slightly in the wrong direction. Free cash flow is still booming and growth overall is impossibly high for a firm this size. And now, the bullish argument I promised you at the top.

While Facebook and Google have done away with plans to create a satellite based Internet for the rest of the world that doesn't have access, Facebook is continuing on with a plan to launch solar based drones to hover over remote areas of planet Earth to provide Internet access. They might sound crazy, foolish, useless and desperate. Or, it could sound like Mark Zuckerberg is going to crush doubters again and smash all expectations. If he is able to connect a chunk of the remaining 4.5 billion people in the world and is doing it by himself, the stock could double in a matter of years and near half a trillion dollars.

I would not bet against that man, who unlike Twitter, has put together a brain trust in his firm and his board of forward thinking, non-founder innovators that check his every move and continue to simply say, "wow."