Hello!
I am sure most of you know roughly what has happened to facebook in this latest development in the markets. The data "breach", the drop in their stock from a close to ATH 185 all the way down to 160, a 14% drop in their market cap. There is a lot of misinformation out there, and while I do not say I am right, I have a tendency to trust what numbers tell me.
Disclaimer: This is my own analysis. Feel free to take this information and make whatever choice you would like. I have no intrest in analyzing the actual events and exact details of this even. If you want that, my analyses are not where you want to be. I analyze numbers, fundamentals and management actions, which is what matters in my eyes long term. An example of this is that some people believe that Facebook as a business contain risk of social media trends. Where their mistake is in my eyes is that this risk in intangible for them. Practically useless. I translate this risk into numbers by balancing MAU, DAU, average revenue per user, indefinite maturity rate and discount rate, allowing me to take the risk into actual calculations.
Financials
I used my model for Facebook and built multiple versions, trying to pinpoint where they could be going in the future, and what the general market expectation is. For Facebook because I believe that the platform contains a base trend risk, I evaluate their financials with a maturity rate of -3%, and a discount rate of 8%.
It is fairly realistic to assume that as Facebook matures additionally as a company, we will see minor drops in margins. It is really fantastic how facebook have maintained their current margins for this long while not adding on any debt (currently $0 debt & $41 Billion net cash). Therefore it is very probable we will see their gross margin and operating margin drop, to 82% (from 87%) and 50% down by 2% per year until they reacg around 35%, which is realistic compared to other internet platforms.
Now using my standard evaluation of growth companies, Facebook is unrealistically undervalued (183% upside). This evaluation comes from assuming the margin shrinkage mentioned above, as well as a annual growth reduction by 5-2% per year (steep to begin with). Facebooks exceptional margins makes any growth profitable to the point of insanity. This evaluation gives facebook 54% upside at their all time high.
The market
Right now, the market puts facebook at $160 per share, a market cap of $465 Billion. To achive their evalution, with the slightly-grim assumption of -3% maturity and 8% discount, we need a steep lowering of growth as well as a fall of their margins. We can easily achive this evaluation by expecting a margin drop of net margin from the current 40$ to 12% over 15 years. On top of this, we need to have their revenue growth basically collapse. The revenue would have to act similary to this drop of 47% y/y in 2017, 33% in 2018, 25% in 2021 all the way down to the loss of growth in 2026, maturing from there (@-3% net margin). These assumption puts the net present value at the current $160 per share.
This picture is very, very grim.
My opinion
The market assumes Facebook to start shrinking in 12 years, after losing growth rapidly, something that haven't happen since it took off. I see the media today capitalizing on the hate, portraying that the public is deleting Facebook and that the platform will die similar to Myspace. This to me is an obvious media push. The loss of growth that the cost would require is absurd. Even in previous cases where Facebook and privacy have been in headlines, their monthly active users grew. Growth will slow down as they are unable to add more users, but the company is worth over 13000 times that what myspce was at when it started declning. This business is a global superpower, and could today with what is in their warchest acquire myspace as sold over a thousand times. Anyone who compares the two are delusional.
Facebook is today in my opinion worth, at a conservative view, $200 usd per share. They are year over year adding 23% monthly active users in Asia, and is successfully profiting from them. They are still growing in the western world, with a very understandable slowdown in growth. The company today prints money to absurdly low costs. It is truly impressive compared to other companies. They are priced for growth, and the risk comes in from not growing. However, the abrupt drop in growth that the current price demands is unrealistic. If facebook would maintain their growth trend throughout 2018, that will be enough to show that the ridiculous loss of growth that the market seems to irrationally expect is just that. Ridiculous.
Feel free to ask questions and discuss!
/u/lykosen11
Submitted March 27, 2018 at 08:39AM by lykosen11 https://ift.tt/2un8hXk
