I’m surprised no ones talking about Facebook here. This stock has been looking really good for the past two years and isn’t showing any signs of slowing down. They have a high amount of cash in the bank and an extremely low amount of debt. They also have a ton of investor support (able to raise massive amounts of money in short periods of time) The P/E seems scary at about 105 now but to me this stock still seems undervalued. I tried to look at sell side reports on this stock and it’s hard to find any real argument as to why Facebook isn’t a keeper. Is this the next Apple? Any sell side analyst out there?
What PE do you think would constitute being overvalued?
Is P/E really that relevant on whether this would be a good buy or not? If EPS grows wouldn’t that in return reduce P/E (The forward P/E is about 38) I guess my point is P/E is high but the growth potential is there. Zuckerburg is young and seems to be a visionary and has some ideas on expansion (China maybe). What red flags are there in this company?
Remember that being a good and successful company is not the same as being a good stock buy.
^ Words of the wise.
ive been all in for 2 years
Owned it on the IPO. Out for a while now. I’d rather own AMZN in that kind of company. Much higher barriers to entry.
The P/E on AMZN is almost 900. Bchad you make a good point, there is a chance that any company in the market is overvalued and in that case it would be a succesful company but not a good buy. How would you detemine the target P/E for a company in the tech world where P/E is generally high anyway.
Once P/E is above 50 comparisons cease to matter.
At 105, the earnings yield is just a little under 1%, so if all of Facebook’s earnings got paid out to you, and nothing else good or bad happened, you could expect about a 1% return by owning facebook. That’s about 70 basis points more than you could get by owning a one year T-bill which has virtually no risk as long as you don’t expect to need the money before it matures (and pretty low risk even if you do).
That’s of course pre-tax, but maybe you are somehow in a non-taxable fund. If you are taxable, then you’re looking at maybe 50 bps extra for owning all that stock risk, vs investing the same amount in the 1 year T-bill.
At this point, you have to ask yourself, “If I’m going to assume stock risk, maybe there’s something that pays bettter than 50-70 basis points”
Of course, that’s just the dividend return, assuming a 100% payout. You’ll also have the change in price, which boils down to the change in the earnings multiple. At 105, it seems to me that there’s a lot more space to go down than there is to go up. If the PE drops from 105 to 100 over the course of the year, then your 1% earnings yeild just got crushed by a 4.7% loss in the stock price, leading to a 3.7% loss. Of course it could drop to something like 50 as well, which would be very serious. Alternately it might even go up from 105, but the people who are pushing the price up from 105 probably aren’t serious investors.
Once a stock is over about 40 or 50, it’s not really an investment, it’s a trading security. You can try to follow the momentum and or use some trading strategy, but it is unlikely to be a long-term hold kind of thing. And all of this is fairly independent of whether FB grows or not as a business.
In this simplified analysis, I haven’t considered the case of retained earnings being plowed back into a high ROE company. I don’t know what ROE is for FB, a quick google search suggests that it’s about 8% or 9%, which seems kinda low, but maybe it’s a zero debt company, in which case it’s not all that bad even if nothing exceptional. Still, the ROE is not all that different from the long term total return of the S&P 500, which says to me that it doesn’t look like the growth is there to support a PE much larger than the PE of the market as a whole, which is around 25 (Shiller index; the 1 year forward PE looks like it’s closer to 21 or 22).
That’s my take on it, based on 5 minutes of research. You’re almost entirely exposed to multiple expansion and/or compression, and the growth in earnings would have to be enormous to support a 105 PE. Even if FB continues to grow, it’s hard to see how it gets to that level.
with FB, eventually growth in ads will slow substantially and user growth will stop as well. this is the best case scenario wherein it retains its users and has ad pricing power. so FB at 100x is crazy to me.
AMZN on the other hand, though it is ridiculously priced, any company that can grow revenues consistently above 20% when your revenues are in the tens of billions is a force. AMZN’s growth trajectory is much more logical and difficult to deny as well. it is not inconceivable that AMZN could end up selling 10-20% of the world’s products by revenues and if it ever achieved this, its valuation would be exponentially higher. i currently see nothing stopping AMZN from killing the vast majority of retail businesses and absorbing their revenues. you have to really imagine what the retail landscape will look like in 10 or 20 years to understand just how profitable AMZN could eventually become. as small box retail, potentially including grocery stores, is eventually killed off, this will give the retail survivors (e.g. Wal-Mart, Target, Costco, various specialty stores) more pricing power allowing them to raise prices and this will result in more price flexibility for AMZN and much wider margins. if in 20 years AMZN’s sales are 16x what they are today (assumed a 15% LT growth rate), say $1.6T annually and they pull a retail like margin of 4-5% of revenues like big box retail today, annual profits are $64-$80B per year. smack a 20x multiple on that and you have a mkt cap of $1.28-$1.6T. 4.5-6x its current valuation. the case for AMZN to catch up to its valuation is not all that crazy. it will likely catch up in a big way even if its growth rate drops significantly from today’s levels.
The key with both AMZN and FB is will the growth continue if not the price is going to get smacked. Looking at FB financials it looks great. They have low debt and excellent liquidity (current ratio = 9.01x). One point I can add on the sell side is that EV/Sales has been increasing from 13.6x back in June to now 19.02x, which suggest that the price is rising at a faster rate than the sales. FB has a ton of cash just sitting there 15bn and their debt is a measly 149 million. I dont see growth being hindered by their liquidity and I don’t see any competition taking away users from FB. FB to me is like the gateway social network. Before you sign up for anything else you sign up for facebook first. The question is will they keep growing? and if not why? Ive read that in June they had about 1.44bn monthly users (20% of the world’s pop) there’s a lot of room to grow there as FB could potentially have over 7bn monthly users haha
Be careful with the current ratios on these tech firms doing big buybacks (AAPL), not sure about FB. They issue billions in debt because most of that cash is trapped and it won’t be nearly what it’s balance sheet value is if it were brought back to America. Issuing a billion in long term debt and holding the cash will improve your current ratio but has not impacted value.
3 billion people
60% of world’s population still won’t have Internet by the end of 2014. A report this week by the United Nations says nearly 3 billion people around the world will have access to the Internet by the end of 2014. But 4.2 billion will remain unconnected.May 7, 2014
They have really high adoption. This is why they want to fly balloons with internet all over the place (maybe that’s google, all these tech firms have similiar ideas) People on the internet:
3 billion people
60% of world’s population still won’t have Internet by the end of 2014. A report this week by the United Nations says nearly 3 billion people around the world will have access to the Internet by the end of 2014. But 4.2 billion will remain unconnected.May 7, 2014
That adoption rate also assumes no one leaves the network. I’ve dumped my Facebook account. Too much garbage.
I foolishly sold this a few months after the IPO, otherwise I’d be trolling this forum incessantly about FB. I still think this is a great company, but at an estimated 2% FCF yield, too high for now.
If all those metrics remained the same but the stock was down would you be just as bullish?
Could also look at it as FB is trading at 105 years worth of cumulative NI.
As for past performance, of course it looks good. The valuation had to get to 105 somehow, and it sure wasn’t from earnings.