Facebook Added Over $350 Billion In Value Since 2016. Can It Repeat?
Facebook’s (NASDAQ: FB) market cap has more than doubled since the end of 2016, with the company valued at roughly $720 billion as of August 2020. In effect, the company added over $350 billion in value or roughly 4x the current market capitalization of Twitter (NYSE: TWTR), Snap (NYSE: SNAP), and Pinterest (NYSE: PINS) combined. So how did this happen and can Facebook repeat this feat?
Here’s how: Facebook added about $43 billion in revenue between 2016 and 2019, marking an increase of 156% over three years. While Net Margins fell from around 37% in 2016 to about 32% in 2019 (adding back the impact of the company’s $5 billion settlement with the U.S. FTC in 2019), the company still added about $12 billion in adjusted profits over three years. Investors valued these incremental profits at a multiple of about 31x and this has translated into about $370 billion in additional value between 2016 and now. In other words, this has meant that Facebook’s overall trailing P/E multiple contracted from about 35x at the end of 2016 to roughly 32x presently, based on adjusted 2019 earnings.
See our interactive analysis Facebook Revenues: How Does FB Make Money? for more details on Facebook’s business model and key revenue streams.
Could This Happen Again In The Next Few Years?
Facebook’s Revenues grow by about 58% between FY’19 and FY’22, to about $112 billion (average growth of 16.5% per year, below the 36% average annual growth rate seen over the last three years), driven by improving monetization of assets such as Instagram and WhatsApp in international markets and continuing growth in the digital advertising space. If Net Margins also rise by about 100 bps to around 33%, driven by better cost absorption, Facebook’s Net Income would grow by roughly 60% to over $37 billion in 2022.
Now if earnings grow by roughly 60% or 1.6x, the P/E multiple would shrink by a similar amount (1.6x), assuming the stock price stays the same, right? But that’s exactly what Facebook investors are betting will not happen! If earnings expand 60% through 2022, instead of the trailing P/E shrinking from around 32x presently to about 20x to keep the share price constant, a scenario where the P/E remains flat at about 32x looks more likely.
For perspective, the current P/E multiples for Internet software companies stands at about 60x, meaning that Facebook already trades at levels below the sector average.  This would make a 60% growth in Facebook’s valuation to about $1.15 trillion a real possibility by the year 2022. This translates into about $430 billion in incremental value.
Microsoft MSFT is interested in buying fast-growing social media app TikTok’s U.S. operations. Could this make Microsoft a better bet compared to Facebook? Find out more about how TikTok compares with Facebook in our analysis.
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