Facebook (FB, Financial) is now worth $500 billion. Chairman and CEO Mark Zuckerberg is closing in on Warren Buffett (Trades, Portfolio) for the fourth-wealthiest human on Earth. I hate to admit this, but Gary Vaynerchuk was right about the short-term price increase on Facebook this year, seeing (and even driving) the growth of online ad spend on the platform. That said, there is no way the company can continue to justify its price multiple at this point.
Even Valueline has a target price range of $230 to $340 on the stock. That means at the high end, the company would be worth $1 trillion if Valueline is right. The chances are that will not happen anytime soon.
No doubt, Facebook is crushing it. Since going public in 2012 the company has seen a 10x rise in profit on 6x increase in revenue. Its free cash flow in the last 12 months was $13 billion, boosting its total cash position to more than $32 billion. It has increased gross margins to 86.4%, net margins are 38.1%, and return on equity is 21% – all numbers that would make any investor salivate at the right price.
No company can trade at levels like this forever. The same goes for Google, but let’s focus on Facebook for now. The earnings beat was easy to predict after Google’s release, but long term both companies will come back down to normalized values. That will happen through large selloffs or stagnant stock prices. In either case, now is not the time to buy.
Wall Street continue to tout the stock.
RBC Capital Markets has an Outperform rating with a price target of $195 (previously $185) with analyst Mark Mahaney saying that "Yes, we are incrementally more positive. Core Facebook is growing extremely well with almost unprecedented ad revenue growth consistency. More important, we believe that Facebook's current low market shares – approximately 15% of global online advertising and 5% of global total advertising – will help it to maintain premium growth for a long time."
Goldman Sachs has a Buy rating with a $205 price target (previously $180) with the company’s analysts stating: “We expect consensus estimates to increase on the back of this quarter's beat, though management once again pointed to decelerating revenue growth in the second half as Facebook ad load reaches saturation. However, we continue to see opportunities for incremental ad load on Instagram, increased engagement from Instagram stories, and (while early) potential for new monetization levers through Messenger and WhatsApp."
Add JPMorgan, Jeffries, Morgan Stanley, Credit Suisse, Oppenheimer and a “google” of others to the list of bullish firms. It never ceases to amaze me how analysts continue to pile onto a company’s stock to maintain high valuations. Make no mistake about it, 37 times earnings for a $500 billion company is a very high valuation. Facebook may very well become the world’s first trillion-dollar company in the next five to 10 years. I don’t think it’ll do it by trading for 30 times earnings.
It’s likely that over the next five years:
- Sales growth will slow with new members – a double would be the best-case scenario.
- Profit margins will decrease as more acquisitions and products come out of the company.
- Net income will rise but cap out around $20 billion (best case).
- The earnings multiple will come down, pricing out in the 20x to 30x range.
All that puts the stock in $400 billion to $600 billion territory, making it overvalued based on the current trading price. Don’t forget the other side to the greed coin: “Be fearful when others are greedy.”
Disclosure: I am not long/short Facebook.
