Why Facebook’s Valuation Remains Attractive Despite Its Trillion Dollar Market Cap
Facebook is one of the largest technology companies in the world and has managed to derive outsized gains since it went public back in 2012. Since its IPO, the Facebook stock has returned 828% in cumulative gains, easily surpassing the S&P 500 which has gained 288% in this period.
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Q2 2021 hedge fund letters, conferences and more
According to Plus500, Facebook was the latest company to be valued at a market cap of $1 trillion, following Apple, Amazon, Microsoft, and Alphabet.
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Despite its market-thumping gains, FB stock is well-positioned to outperform peers and the broader markets in 2021 and beyond.
Strong growth expected in Q2 of 2021
In the first quarter of 2021, Facebook sales were up 48% year over year at $26.2 million while net income rose 94% year over year. Wall Street forecasts the company to post revenue of $23.7 billion in Q1.
In 2020, the ongoing pandemic impacted FB’s top-line as sales were up “just” 20% year over year. Now sustained growth in the digital economy, as well as an increase in price per ad and higher ad impressions across Facebook’ s services, is likely to accelerate revenue growth in the upcoming quarters.
In the second quarter, Facebook’s management expects the momentum to continue and forecast sales growth to be in line or accelerate marginally compared to growth rates in the March quarter. Facebook generally provides a conservative outlook and investors can expect actual growth to be significantly higher.
In fact, analysts expect FB to grow sales by almost 60% year over year in Q2. In the second quarter of 2020, its sales were up a measly 11% as enterprise spending was subdued amid lower consumer demand and economic lockdowns.
Facebook enjoys a leadership position
After Alphabet, Facebook is the second largest digital advertising platform in the world. It will continue to benefit from an increase in ad spending as companies are looking to establish and scale their digital presence.
Further, Facebook also leads the social media space. A staggering 2.7 billion people use one or more apps owned by the company each day including WhatsApp, Instagram, Messenger, and its namesake Facebook. The social-media giant has 3.45 billion monthly active users, which means 44% of the global population uses some sort of FB platform.
Investors should also note that WhatsApp and Messenger are yet to be monetized and may be key revenue drivers in the upcoming decade.
During its Q1 earnings call, Facebook confirmed over 200 million businesses use its platform to engage with their audience base. The shift towards e-commerce accelerated at a fast clip amid COVID-19 as physical stores were closed, leaving companies with a digital presence to cater to customer demand.
The Facebook Marketplace is fast gaining traction and is one of the biggest platforms for people to buy and sell products. The company confirmed the Marketplace attracts over a billion visitors each month.
FB continues to expand its suite of digital products and solutions due to the rapidly increasing e-commerce market. Last year, it launched Facebook Shops which now has over a million active shops and 250 monthly visitors.
In the Q1 earnings call, company CEO Mark Zuckerberg added, “We recently updated WhatsApp catalog, so businesses can keep them updated from their computers and to include what’s in stock. We launched carts on WhatsApp last year, and people have used them to send orders more than 5 million times.”
Facebook is already fast gaining traction in the hardware segment with its Oculus range of AR/VR products. According to Zuckerberg, Oculus sales in Q1 reached an inflection point and now account for the majority of its Other business segment revenue. In Q1, this segment reported sales of $732 million, indicating a year-over-year increase of 146%.
What next for investors?
Facebook sales are forecast to rise by 35% year over year to $116 billion in 2021 and by 19.3% to $138.25 billion in 2022. In fact, FB might generate around $100 billion in ad sales this year. Comparatively, its adjusted earnings are forecast to rise at an annual rate of 24% in the next five years.
Given its market cap of $1 trillion, FB stock is valued at a forward price to sales multiple 8.6x and a price to earnings multiple of 27x, which means its trading at a reasonable valuation and has significant upside potential.
Wall Street expects the Facebook stock to touch $387 in the next 12-month, up from its current price of $354.70.