Hi, I'm Jimmy in this video
we're looking at Facebook stock
ticker symbol FB.
We're gonna look quickly at Facebook
as business and then add
some of their numbers and then we're
going to try to value Facebook stock
using a discounted cash flow
analysis.
Okay. So let's jump right into
Facebook business.
So Facebook core business
is the Facebook platform where
they have more than a billion and a
half daily users
and almost two and a half billion
monthly users.
Okay. Now, I'm sure most of us know
that if not the numbers themselves,
certainly we know that they're a
huge platform.
So on top of that, Facebook
also has platforms like
Instagram, Messenger, WhatsApp,
they have Oculus and then they're
trying to launch their own digital
currency called Libra.
Now, those numbers I just mentioned
a second ago.
Well, that's just Facebook.
I believe that they have something
like two point seven billion unique
viewers on all of their products
combined.
So if we were to use, let's say,
Facebook and Instagram, we only
count as one unique viewer.
Okay. So that's big.
And clearly, the majority of their
revenue is driven through
advertising.
And this is their revenue and
of this revenue.
There's a chart of the revenue, end
of this revenue.
Ninety nine percent more than ninety
nine percent is generated from
advertising.
So in 2018, they had about fifty
six billion dollars in revenue.
And then in 2020, analysts
are estimating green bars, those
analyst estimates, they're expecting
for them to have over eighty five
billion dollars.
Now, these revenue numbers aren't
just Facebook.
They're everything that Facebook
have. So Instagram, Messenger,
WhatsApp, all of that.
Instagram has been pushing the
Instagram story ads that's
done a decent job of keeping their
revenue growth going.
They also have ads and messenger
WhatsApp.
Either way, Facebook is huge.
And they one of their biggest value
propositions to potential
advertisers is that they have a ton
of data on all their users.
And this can be quite helpful when
advertisers want to target a
specific audience and they usually
do. And I'm sure that many of
us have heard that this has gotten
Facebook into a lot of hot water
with the government lately.
So about halfway through
28, 19, Facebook
got hit with about a five billion
dollar fine by the FTC.
Plus the FTC came out and said
that they're going to have stricter
oversight over what Facebook,
how they're managing their privacy.
Now, this is important because this
has the potential to restrict how
much data Facebook can collect from
users or maybe
how they can use that data.
And at first glance, from
from our perspective, from a
consumer perspective, well,
this is probably a good thing.
But from a business perspective,
from a generating revenue
perspective, this has the potential
to limit how many custom ads
Facebook can offer.
And custom ads are way more
profitable.
So, yes, if big
restrictions were to come down, that
could seriously restrict how much
this revenue continues to grow.
Now, I also think it's important to
point out that Facebook, like many
companies, is doing whatever they
can to keep growing as an example.
Just recently, Facebook launched an
app called Threads
and it's supposed to be a companion
app to Instagram.
And basically it allows for us
to share our photos or videos
or whatever we do on typically on
Instagram, on threads
except on threads.
It only goes to a small group
of friends.
And this is right in line with the
stated goal of Mark Zuckerberg.
And ultimately, that is to try
to get the platform to be more
personal. He believes that the key
to the platform success
is the ability for smaller groups
to form closer and more personal
relationships.
And in theory, this would increase
user engagement, which would
ultimately increase revenue.
Another way they're looking to
increase revenue is Facebook
is recently pushing out Instagram
checkout. Now, this is
potentially huge for Facebook
or really for Instagram in this
case. But either way, huge for what
this could bring to the company.
So Instagram has more
active users than eBay and Amazon
combined.
So the goal with Instagram checkout
is for is to allow for users
to buy products simply
and easily right through Instagram.
And since we know that Facebook and
Instagram and the whole network of
apps. Well, they have a ton
of users.
And I'm sure we can all imagine if
people start buying their products
on Facebook or on Instagram
instead of on Amazon
or eBay or whatever it might be, we
can imagine what that would do for
their revenue stream and ultimately
Facebook stock.
OK. So those are, though, some of
the key big picture points of
what's going on with Facebook
business. Now let's look at some of
the key numbers.
So this is revenue, but
as I'm sure we can guess and we
switch over to net income, which is
the same as profit.
Well, once again, the bottom line
of Facebook looks fantastic.
Even when we switch over to net
income margins.
Well, obviously, this was going to
be good. But they have nearly 40
percent net income profit margins in
2010. That's what they had.
And that's a great number.
Good for any year, but to put
that in perspective, during 2018,
the average company on the
S&P 500 put up about profit
margins about 10 and a quarter
percent during 2018.
So almost 40 percent is crazy.
Good. Now, as we alluded to, one
potential thing that could slow or
restrict some of these margins or
slow some of the growth is
there and the investments that
they're now making into the
privacy part of their business.
Now, like I said, ultimately, I
think that this is going to be a
good thing for users.
But in the meantime, it's likely
to increase their operating
expenses, which will lower free cash
flow, lower profits.
So this will number of fall and we
switch over to free cash flow.
That number could get restricted as
well. This chart goes back to 2012.
And as we could see, the
dip in 2018 was really
the start of Facebook as regulatory
issues. And in 2019?
Well, that number is expected to be
better than 2018 was, but not
quite as high as 2017
was. It's unexpected, the past, that
level until we get to 2020.
Once they get to 2020, many analysts
are expecting for Facebook stock
and Facebook.
Revenue and profit to continue
growth in a substantial way.
And that has the potential for
Facebook stock to really take off.
So our question is now, what do we
think Facebook stock is worth today?
Well, this is our discounted cash
flow calculation.
And as we could see this with this
type of valuation technique, it puts
the fair value of Facebook stock
at about two hundred sixteen dollars
per share.
Now, let's run through real quick
how we did this.
And if you're curious, this is
actually an Excel spreadsheet
template that I built.
And the goal of it just
is to try to help us to sort of
step by step come up with a
discounted cash flow valuation
number. So I did a video
on how to do that. If you're
curious, is the link in the
description below.
You can all email a spreadsheet.
It's free. So if you want it, it's
down below. Okay.
So these numbers up here, these are
analyst estimates.
And what we did is we took analyst
estimates and we discount of those
by our required rate of return of
eight and a half percent.
This is typically about where I like
to use on a personal basis.
And then we used a perpetual
growth rate of 2.5 percent to
come up with our terminal value.
That's also typically where I like
to be from a perpetual growth rate
perspective, because I estimate that
to be about the long term growth of
the economy as a whole.
All of this gives us an estimated
value of Facebook as a company
of about 500, 20 billion dollars.
We take that, we divide that by the
shares outstanding and we end up
with an estimated fair value of
Facebook stock of about two hundred
sixteen dollars per share.
OK, so that doesn't look too bad,
especially when we consider that
Facebook current stock price is
about one hundred eighty five
dollars per share.
Now, we may also notice this side
here. Now, what this that accounts
for is the net debt of the
company. So this fair value
of to 16 per share.
Well, that's for the whole company.
It's not just the per share value.
It's also the value
of the debt.
So if a company had a lot of debt,
well, this number over here
should be lower.
Now, we may notice that in Facebook
case, the number is actually higher.
Why? Because Facebook
doesn't have any debt.
And technically, what we're looking
at over here is net debt, which is
you take the debt, you offset it by
the amount of cash that they have.
So this is a chart of
Facebook.
Cash versus long term
debt. And as we can see,
they have no long term debt and they
have a ton of cash.
So when we switch back to this kind
of cash flow.
Well, that's what's happening here.
We're accounting for the fact that
they have 40 or so billion dollars
in cash. So in theory, you
add that to the
net value of the company divided by
the same number of shares
outstanding.
And we end up with a fair value
of Facebook stock when accounting
for the cash position really
of about two hundred thirty three
dollars.
OK. So that's interesting.
But generally, personally,
I prefer to use the two hundred
sixteen dollars number when
it comes to trying
to account for where to come up with
our entry price.
And I did a video on when to buy a
stock that is linked in the
description below, if you're curious.
But I prefer the 216
dollar number because that's
a more conservative approach in my
opinion. The idea of paying for cash
in this scenario seems a bit
it seems a bit risky.
In theory, Facebook could go out
tomorrow and go purchase
a company with all that cash.
All that cash would be gone.
Sure, we could make the argument
that are the
acquisition that they made would add
to the value of the company, but it
may not depending on the quality of
that acquisition.
So to me, cash is a bit too fleeting
to use that number.
It's interesting to consider, but I
wouldn't if I were buying this
company right now.
I wouldn't use that number.
I use it to 16.
But that's just my opinion.
What do you think?
Do you think that Facebook stock is
a good buy at one hundred eighty
five dollars or so level right now?
Please let me know what you think in
the comments below.
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Button and thank you so much for
sticking with me all the way to the
end of the video.
I really do appreciate it and
I'll see in the next video.
Thanks.