Summary
- FB is the largest online social network in the world (). Given its enormous reach, with 2.5 billion monthly active users, it is a much sought-after conveyor of ads.
- In this post we provide a simulation-based (sim-based) valuation () of FB.
- Our sim-based analysis suggests the following fair values – stock price: $417.67, and price-to-earnings ratio: 32.61. At the time of this writing, FB trades at $324, so it appears to be undervalued, with a potential upside of about 29%.
Facebook (FB)
FB is the largest online social network in the world (). Given its enormous reach, with 2.5 billion monthly active users, it is a much sought-after conveyor of ads. As such, most of its sales are from ads placed within its “ecosystem”: the Facebook app, Instagram, Messenger, WhatsApp, and various app-specific features. Ad sales represents more than 90% of FB’s total sales; with 50% being in the U.S. and Canada, and 25% in Europe.
Estimating a fair value for the stock
In this post we provide a simulation-based (sim-based) valuation () of FB.
At the time of this writing the company had a profit margin of 37% and a price-to-earnings (PE) ratio of 25.3. The expected growth in earnings for the next 5 years is 28.6%, which is what we will use for the sim-based earnings growth rate. The table below summarizes our sim-based results.
Since our sim-based analysis uses a S&P 500 return as a basis, our results summarized on the table above suggest the following fair values – stock price: $417.67, and PE ratio: 32.61. At the time of this writing, FB trades at $324, so it appears to be undervalued, with a potential upside of about 29%.
Final thoughts
Is inflation likely to become a problem for FB? We often hear from experts on business media outlets that inflation has a much more pernicious effect on growth stocks than value stocks. We looked into this issue in another post (). Our analyses suggested that growth stocks may do better under relatively high inflation (around 5%) than value stocks.
Moreover, FB’s leadership position would allow it to raise its prices to make up for inflation. Many other firms would not be in the same position, as the leaders in any industry are by definition only a few in number. This could lead to PE expansion, which would make our estimate conservative.
Disclosure
The author owns FB shares at the time of this writing.
