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Facebook poised for more upside?

Facebook poised for more upside?

  • High return on assets
  • Low debt
  • Low cost of capital
  • High growth rates
  • Interesting technical formation

Facebook Inc became listed in 2012, in the world’s biggest IPO up until that date, valuing it at 104 billion dollars. Today it trades on NASDAQ and has its base in California. As the world’s largest social media platform it makes most of its money from advertisement.

During the last couple of years Facebook have gotten involved in a few controversies. Yet the company’s revenue growth have kept on going higher. Especially over the long run the revenues are impressive, at around 50 percent a year, for the last ten years. And during the last three years it’s annual revenue growth is still high, at around 25 percent. The stock price could see more upside if this growth continues.

Facebook’s price earnings ratio is around 30, which is low compared to its History. Its EV/EBIT stands at around 22, which is much lower than its highest numbers of above 150. It meets several stringent fundamental debt requirements. For example the debt to equity is low compared to its industry.

Cash cow

And Facebook is raking in cash. Free cash flow grows at an annual rate of 50 percent, over the long term. Facebook has used this to its advantage by reinvesting its cash and doing acquistions. But without losing much of its value, since the cost of capital is quite low.

Realistic expectations

Taking a more conservative outlook the growth might come down in the future. A growth of about ten to fifteen percent might be more realistic for the coming years. Because the company is large and maturing. But even if the growth tapers off the company is still very profitable.

FAANGs leading the way

Facebook is a FAANG-stock. FAANG is the acronym for Facebook, Amazon, Apple, Netflix and Google. This group has been trading sideways for the last year or so. But broke out again in October, and Facebook has not followed suit. If Facebook follows the lead of Apple this could mean big upside for the stock.

RSI is increasing in a longer base, of over two years, which is now moving towards its higher resistance area. The 200 day moving average has acted as support twice, after it got broken to the upside and is now pointing higher.

Facebook stock
The 200 day moving average has acted as an important support area – Chart from TradingView

A future price target of over 270 dollars is not unlikely, based on this picture.

Threats and potential

Privacy concerns have been an issue for some time. And the company has had to change their practices to be more compliant. Despite this the effect on margins has been quite small. They have also put money into professionalising their ads. This is to make them more suited to their customers needs and their customer’s search history. Facebook’s strategy for the coming years is to focuse more on improving the user experience. Investments in virtual reality, cryptocurrency and payment systems could boost the profits further.

Libra coin

Facebook is part of the Libra Association. Libra consists of 28 organizations planning to create a cryptocurrency called Libra. Libra is going to run on Facebook’s platform and plan to launch in 2020, eventually in many regions of the world. According to Facebook Libra is going to help poorer customers across the world. Because many of them cannot open a bank account. Billions of people lack access to the payments systems of today. Whether this will come true or not remains to see. But there is a huge profit potential there.

Insider ownership

Mark Zuckerberg is the CEO and founder of Facebook and owns around 28 percent of the company. Since he started the company he has built it into a multi billion dollar company. And he has a big vested interest in seeing his lifework keep on succeeding. This is good for shareholders.

The growth of Facebook has continued despite the criticisms against the company. The gloomy outlook, sell off and sideways trend this has resulted in could be temporary. And it might actually present a buying opportunity. Its high growth in an economy that could be heating up, which you can read more about here, might be good for the stock price.

Conclusion

Facebook might be poised for more upside in the medium to longer term. And the growth might take the stock higher. When I write this, in november 2019, the stock is trading at between 198-202 dollars. Based on price combined with growing profits I see a price target of at least 270 dollars, looking at a time horizon of about one to two years.

Disclaimer: As of november 29, 2019, I am long Facebook. All information found on this site, ideas, opinions, predictions, commentaries are for informational, entertainment or educational purposes only and should not be construed as personal investment advice. While the information provided is believed to be accurate, it may include errors or inaccuracies. I will not and cannot be held accountable for any actions you take as a result of what you read in here. Use the information at your own risk. I am not your investment advisor. Consult a licensed financial advisor before making any investment decisions.

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