The stock of Facebook (NAS:FB, 30-year Financials) appears to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $294.9 per share and the market cap of $839.8 billion, Facebook stock is believed to be fairly valued. GF Value for Facebook is shown in the chart below.
Because Facebook is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 29.4% over the past three years and is estimated to grow 19.65% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Facebook has a cash-to-debt ratio of 5.82, which is in the middle range of the companies in Interactive Media industry. GuruFocus ranks the overall financial strength of Facebook at 7 out of 10, which indicates that the financial strength of Facebook is fair. This is the debt and cash of Facebook over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Facebook has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $86 billion and earnings of $10.1 a share. Its operating margin is 38.00%, which ranks better than 93% of the companies in Interactive Media industry. Overall, GuruFocus ranks the profitability of Facebook at 10 out of 10, which indicates strong profitability. This is the revenue and net income of Facebook over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Facebook is 29.4%, which ranks better than 80% of the companies in Interactive Media industry. The 3-year average EBITDA growth rate is 19.6%, which ranks in the middle range of the companies in Interactive Media industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Facebook's return on invested capital is 36.96, and its cost of capital is 9.47. The historical ROIC vs WACC comparison of Facebook is shown below:
In short, Facebook (NAS:FB, 30-year Financials) stock gives every indication of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Interactive Media industry. To learn more about Facebook stock, you can check out its 30-year Financials here.
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