Facebook (FB, Financial), not so long ago, reported another blunder with its advertising metrics. To resolve this concern, the $333 billion social media giant initiated several procedures, including cooperating with Nielsen, a renowned advertising agency. Although market reaction seems to be negligible, reviewing Facebook’s figures should be worthwhile.
Valuations
Facebook currently has a trailing 12-month price-earnings (P/E) ratio of 44 times (industry median: 29), price-book (P/B) ratio of 6.1 times (industry median: 3.2) and price-sales (P/S) ratio of 13.4 times (industry median: 2.59)(1).
(Stock Performance Graph, Annual Filing)
Facebook enlisted as a public company in 2012. Facebook first disappointed shareholders after returning sub-market figures several months after its initial public offering before finally taking off and outperforming the broader Standard & Poor’s 500 index.
Facebook has outperformed with a 34.85% total return for the past three years compared to the broader index's 8.94%. Year-to-date, the tech giant returned 10.26% versus the latter’s 9.41% (2).
Earnings performance
On Nov. 2, the social media giant delivered its third quarter and nine-month business operations figures. Facebook grew its top line by 55.8% to $18.8 billion three quarters into fiscal 2016. Profits grew by 180% to $5.9 billion from $2.1 billion in the same period last year.
As observed, Facebook delivered outstanding bottom-line figures despite a 30% growth in total expenses.
"We had another good quarter. We're making progress putting video first across our apps and executing our 10 year technology roadmap." -Mark Zuckerberg, Facebook founder and CEO.
Facebook was launched Feb. 4, 2004 (3). Its mission is to give people the power to share and make the world more open and connected. Facebook has five globally-known products that aim to achieve this mission: Facebook, Instagram, Messenger, WhatsApp and Oculus (4).
In its third-quarter operational highlights, Facebook highlighted key metrics that help prospective investors understand its business operations: daily active users, mobile daily active users, monthly active users and mobile monthly active users.
(Daily Active Users, 10-K)
Daily active users
Facebook defines a daily active user as a registered user who logged in and visited Facebook through the company’s website or a mobile device or used the Facebook Messenger application on a given day.
In addition to this figure, Facebook also measures its user engagement by dividing its daily active users by monthly active users. As shown in the image above, not only did Facebook demonstrate consistent growth in its daily users, but also more than half, or 65%, were identified as engaged users in December of last year.
As of the third quarter, Facebook’s daily active users grew 17% to 1.18 billion from the same period last year (5).
(Mobile Daily Active Users, 10-K)
Mobile daily active users
Facebook defines a mobile daily active user as a user who accessed Facebook via a mobile application or via mobile versions of the company’s website (such as m.facebook.com) on a mobile phone or tablet, or the Facebook Messenger application on a given day. In addition, a mobile daily active user may have also accessed Facebook on a personal computer that day.
As of the third quarter, Facebook’s mobile daily active users grew 22% to 1.09 billion from the same period last year.
(Monthly Active Users, 10-K)
Monthly active users
Monthly active users are registered Facebook users who have logged in and visited Facebook through the company’s website, a mobile device or used the Messenger application in the last 30 days as of the date of measurement.
As of the third quarter, Facebook’s mobile daily active users grew 16% to 1.79 billion from the same period last year.
(Mobile Monthly Active Users, 10-K)
Mobile monthly active users
Facebook defined a mobile MAU as a user who accessed Facebook via a mobile application or via mobile versions of its website (such as m.facebook.com) on a mobile phone or tablet, or used the Messenger application during the period of measurement. Like the mobile daily active user, mobile monthly active users may have also have accessed Facebook on a personal computer during the period of measurement.
As of the third quarter, Facebook’s mobile daily active users grew 20% to 1.66 billion from the same period last year.
Overall, Facebook had three-year sales and profit growth averages of 55.47% and 43.5%.
Cash, debt and book value
Facebook reported $6 billion in cash and equivalents as of Sept. 30. The company had no debt on its balance sheet. The social media giant also had 34.8% of its $59.7 billion assets in goodwill and intangibles, while having a book value of $54.1 billion.
Cash flow
(Cash flow, Q3 Earnings Release)
Nine months into 2016, Facebook grew its cash flow from operations by 69% to $9.8 billion, mostly due to the company’s tremendous profit growth. Capital expenditures were $3.2 billion, compared to $1.8 billion in the same period last year. Facebook had about $6.54 billion in free cash flow.
Facebook provided neither dividends nor share repurchases in the period.
As observed, Facebook also places a good amount of its cash flow in marketable securities, $17.37 billion in the three quarters as compared to $10.3 billion last year.
Conclusion
Facebook’s cash flow figures truly justify the social media company as an outstanding growing giant. The market has not failed to reward the company with high valuations.
(Five-year Historical Share Price, Google Finance)
With its several metrics, there is no doubt that Facebook’s lifeblood, its members, are continually adding up.
Facebook is observably gushing with cash while requiring no debt to facilitate this positive flow. Facebook continues to live up to its growth story in regard to its recent quarterly report. However, the company dampened this hype in its recent earnings announcement.
(Mark Zuckerberg, CNBC)
According to the company, ad sales growth rates are to decline next year, entailing higher business costs in 2017. In addition, Mark Zuckerberg wants to invest in hiring more engineers and data centers to accomplish the company’s goals.
Nonetheless, how much money will be allocated to engineers or building data centers is a question that remains to be answered. Historically, Facebook has maintained a good level of operating profitability with 34% in a five-year historical average.
(Annual and quarterly filings)
As it turns out, a couple weeks after it issued its sales growth slowdown and additional cost expectations, Facebook announced its first stock repurchase program valued at $6 billion. As of September, Facebook had another $20 billion in marketable securities in addition to its $6 billion in cash. This buyback program, which will be initiated in 2017, should prevent any changes in investor sentiment that reflects dissatisfaction of not being rewarded by the social media giant.
Post-earnings announcement, Mizuho analysts think Facebook is still a buy with a target price of $146 a share. Canaccord Genuity also reiterated a buy with a target price of $150.
Other than this expert guidance, Facebook appears to be an amazingly overvalued. It is hard to call the growing social media company a value investment currently.
In summary, Facebook is a pass.
Notes
(1) Gurufocus data.
(2) Morningstar data.
(3) Wikipedia.
(4) 10-K filing (we/us refers to the Facebook company):
Facebook. Facebook is a mobile application and website that enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers. We had 1.04 billion daily active users (DAUs) on average in December 2015, an increase of 17% compared to December 2014.
We had 934 million DAUs who accessed Facebook from a mobile device on average in December 2015, an increase of 25% compared to December 2014.
There are a number of different ways to engage with people on Facebook, the most important of which is News Feed which displays an algorithmically-ranked series of stories and advertisements individualized for each person.
Instagram. Instagram is a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends.
Messenger. Messenger is a messaging application available for mobile and web on a variety of platforms and devices. Messenger enables people to reach others instantly and simply, and also enables businesses to engage with customers seamlessly and securely.
WhatsApp. WhatsApp Messenger is a fast, simple and reliable mobile messaging application that is used by people around the world and is available on a variety of mobile platforms.
Oculus. Our Oculus virtual reality technology and content platform power products that allow people to enter a completely immersive and interactive environment to play games, consume content, and connect with others.
(5) Me: determining the growth rate per geographical reach, such as daily active user growth in U.S. & Canada and other countries, should be considered to further observed where (or which continent) Facebook derives most of its recent social media presence.
Disclosure: I do not have shares in any of the companies mentioned.
Start a free 7-day trial of Premium Membership to GuruFocus.
