Meta Platforms Inc - Ordinary Shares - Class A

NASDAQ:FB   3:59:59 PM EDT
324.21
-13.82 (-4.09%)
4:58:49 PM EDT: $326.10 +1.89 (+0.58%)
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Why Facebook Could Double; Again



Fundamentals



##Symbol## FB

There is a bullish thesis I want to present, facts only, that points to the possibility of Facebook growing well past its current monumnetal $250 buillish market cap.I'll offer the same type of bearish argument, but the point here is to recognize the extraordinary things that Facebook has done and aims to do. Let's start wit a single chart, below.


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If we take all technology companies with market caps above $40 billion (get used to this peer group, we'll use it a lot), and equal space them on the x-axis (rank them) with net income (TTM), 1-year growth on the y-axis, we can see FB is growing faster than all of them and it's absurdly not even close. FB grew earnings 46% year-over-year which is 50% faster than the next closest company (TXN). That's a wow, but there is a lot more wows to come.

Facebook has mastered mobile ads and that's why it holds the key to unlocking the value of social media. There is no "second place" that competes with Facebook in social media. Google (GOOGL) failed, Twitter (TWTR) is failing (at some level) and LinkedIn (LNKD) has done a wonderful job of simply side-stepping FB altogether and building a totally different business.

We can ask though, where would Facebook be if not for Instagram and What's App (and soon Oculus)? It's an interesting phenomenon to ponder, as mark Zuckerberg has done wonderful things, he also went "all-in" on some huge bets. Remember he bought What's App for an astonishing $19 billion when the firm had 55 employees. He's crazy; like a fox. As we walk through the wonderful things happening at Facebook, let us never forget, that much like Tesla today and Apple of yester-year, this company and its future sit squarely on its founder's back, with all of its weight. He is the difference maker. A bet on Facebook is a bet on Mr. Zuckerberg. Period.



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 5 billion people in the world (most of whom do not have PCs but only smart phones) and is doing it by himself, the stock could double in a matter of years and near half a trillion dollars. Remeber, Facebook is the king of mobile.

Revenue, net income, levered free cash flow over the trailing-twelve-months are all rising. 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. We sit here, for the first time in a very long time, with 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. As of June 2015, the company has 1.44 billion monthly active users.

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:

Technicals   |   Support: 85.65   |   Resistance: 90.1   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

FB has a five bull (top rated) technical rating because it's trading above its 10-, 50-and 200- day moving averages and the stock is up on the day.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
EARNINGS ESTIMATES
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-29 $0.31 $4.4 billion M $4.4 billion M $3.5 billion M Provided by ZACKS


Let's look at the core elements that drive the company's fundamental rating.


Fundamentals Rating Summary



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 13,507 8,916 5,489

Operating Margin (QTR) 1.364 1.75 1.34 FALLING

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

Levered Free Cash Flow (TTM US$ Millions) 4,427 3,140 1,131 RISING

Research and Development (US$ Millions) 1,050 455 293 RISING

Research and Development Expense/Revenue 0.296 0.182 0.201 RISING





Stock Returns and Chart

FB is up +8.5% over the last three months and up +21.2% over the last six months. The stock price is up +33.6% 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.



METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Revenue (TTM US$ Millions) 13,5078,9165,489


Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case, it has been fourteen consecutive quarters).

FB is not only growing revenue by 51.5% 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.

While Facebook is the undisputed king in mobile advertising and engagement with a 22% share of mobile minutes compared to peers at 5%, it's leveraging that with its secure payment technology attached to FB messenger. The service is free and it puts the company inside the international money transfer business, which saw $500 billion in transfers last year. This is a wonderful way for FB to deepen its echo system of nearly 1.5 billion users.

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 chart below.


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Facebook is also immensely efficient at driving that revenue. In fact, if we take all technology firms with market caps above $40 billion and equal space them on the x-axis (rank them) with revenue per employee onthe y-axis, we'll find that other than the king maker that is Apple, FB has the largest revenue per employee.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Operating Revenues/Operating Expense 1.3641.751.34FALLING


Operating revenue over operating expense simply shows us how much revenue (in dollars) is generated for every dollar of expense. The ratio must be (at a minimum) above 1.0 in order for a company to turn an operating profit. For the latest quarter FB showed a ratio of 1.36. While that's high, it has dropped rather significantly from its peak. This is the only fly in the ointment for Facebook, but it's there, no matter how hard we try to avoid looking at it. The trend is dropping fast.

What do all these numbers mean?
A year ago Operating Revenues/Operating Expense was 1.75. 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.


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Net Income (TTM US$ Millions) 2,8101,92367RISING


Net Income (after tax profit) over the trailing twelve months (TTM) for FB is rising,although it is off of its all-time highs. Annual earnings are up 46% year-over-year, which is preposterously large for a mega cap. In fact, its this growth rate that has made Facebook a mega cap. I do note the two consecutive quarters of quarterly (as opposed to annual) net income which we have not seen in two-years for FB.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).


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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Levered Free Cash Flow (TTM US$ Millions) 4,4273,1401,131RISING


Levered Free Cash Flow (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For FB the metric is at an all-time high ($4.4 billion) and has grown 41% year-over-year. FB actually has a rather large stock pile of cash already. I can't ever remember a two-year old growth technology stock that had already accumulated $13 billion in cash. It's truly incredible.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.



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METRIC CURRENT 1YR AGO 2YR AGO DIRECTION
Research and Development (US$ Millions) 1,050455293RISING


Research and Development (US$ Millions) in the most recent quarter for FB was over $1 billion and is up 131% from last year's value of $455 million. Further, it's up 258% from $293 million two-years ago. Now there is this nasty habit of technology firms to put stock based compensation into R&D (I don't know why they do this or why it is allowed with GAAP) so the numbers get a little messy. I would say the cleanest company at reporting R&D is actually Amazon.com (AMZN) and they don't even call it R&D, rather they line item it as "technology and content." In any case, FB spends a huge amount on this line item.

R&D per dollar of revenue for the latest quarter is $0.30. Last year this measure was $0.182 (it's rising).

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars.


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We need to put Facebook's R&D into perspective, because once we do, it's jaw dropping. Facebook spends more on R&D per dollar of revenue than any large cap technology company in North America, and it's not even close. In this final chart again take all technology firm's with market caps above $40 billion, equal space them on the x-axis (rank them) and plot R&D spent per $1 of revenue n the y-axis.


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Now that's a chart.

Summary

The bullish thesis for Facebook goes like this:
The company is growing earnings faster than any large cap technology firm by 50% or more. The company generates more revenue than any large cap technology firm other than Apple (AAPL). The company spends more on R&D per dollar of revenue than company on planet Earth with actual earnings. It totally dominates mobile ads with a 22% share of mobile minutes, more than 5x the minutes spent on Twitter (TWTR) and Snapchat. It's entering the international money transfer realm which is a segment that sees $500 billion a year transferred.Mark Zuckerberg wins, every time he plays and that's why he goes all in.

With the possibility of satellite based Internet for the rest of the world that doesn’t have access, all of a sudden 1.5 billion users sounds like it has room to grow and the people in many of these "rest of the world" countries only have smart phones, and FB is the king of mobile. Oculus is likely going to be an enormous player n the virtual reality wave that's approaching, and if it isn't, Zuckerberg will find which firm is. If all of the "right things" happen, Facebook could double in value in three years. How's that for bullish?

The bearish thesis goes something like this:
The company has run out of users to grow and the idea of expanding the Internet users via satellites is cool, but we have no evidence that it will work and if it does work, we have no evidence that the hardware exists to support it in those countries even if they do get it. Quarterly profits and operating margins have dropped consecutively. The company has $13.5 billion in revenue while its peers like Google (GOOGL) have several fold that size. If it wasn't for some impossibly well timed and shrewd acquisitions, Facebook might be worth half of that it's worth today, maybe even less. Mark Zuckerberg is a genius, but genius runs out. How's that for bearish?

My opinion: I would not bet against Mark Zuckerbeg, 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." He will break all of the rules and he will connect the world and he will continue to do it better than everybody else by a large margin. I have no idea about the valuation today, but in the future, Facebook has plenty of room to grow.