In the months since Facebook Inc.'s (FB, Financial) privacy issues came to light, there have been numerous discussions about the fall of the social media giant, with one commentator even calling it AOL 2.0.
Nothing could be further from the truth. No other media company has an ecosystem like Facebook, which consists of the Facebook app, Instagram, Messenger and WhatsApp. Each of these platforms have over a billion users.
Earlier this month, shares fell off a cliff, dropping 21% as the company released second-quarter earnings, missing revenue projections. It did, however, beat earning per share expectations and sales were up 42% year over year. In addition, daily and monthly active users both increased 11%. In other words, people are using the platform a lot.
More importantly, in the last 12 months, Facebook booked over $19 billion in net income on $48.5 billion in total revenue. That’s a better financial performance than its biggest online competitor, Alphabet's (GOOG, Financial)(GOOGL, Financial) Google, which is valued at $330 million more than the social media giant.
Facebook has successfully navigated the mobile space, understanding that’s where attention is flowing. It’s mobile advertising take was 91% of total sales.
While Wall Street may be concerned with slowing user growth and declining profit margins due to increased expenses thanks to new privacy controls, which are expected to hurt the company’s performance, what matters is usage. People are still using Facebook. In fact, people choose what data to share with the app already, so anything Facebook does will just benefit them in the acquisition and retention of user eyeballs across its network.
Several months ago, it was revealed that Cambridge Analytica improperly accessed data for up to 87 million Facebook users. To try to cover itself, Facebook then lied about what can and cannot be accessed and CEO Mark Zuckerberg went to Capitol Hill to face politicians. The worst is behind it. Attention is the currency of today’s digital world. Facebook remains the most popular and most important social network, which is where the majority of people still get their information.
There’s no reason investors should believe Facebook is faltering. The company has the most engaged audience with the most targeting options for advertisers. If it gets virtual reality and augmented reality technologies right, the potential to pivot the billions of users across the platforms into the “next big thing” is enormous.
Facebook may still be too big to buy if you’re looking for 100% growth in the next three to five years, but long term, it will be a trillion-dollar company, right alongside the other FANG stocks.
At its current profitability, when Facebook gets to the same revenue run as Google or Microsoft (MSFT, Financial), it could be earning north of $50 billion a year. Put a 20 times number on it and investors have $1 trillion. Put a 30 times number and the company is valued at $1.5 trillion. Few companies have the ability to navigate the changes in technology like Facebook, so these figures are a virtual inevitability at this point.
Its current problems are nothing more than opportunities to showcase the brainpower Facebook has accumulated over the years. The company is more of a media conglomerate than service provider, yet it has something big media companies always want-- a built-in fan base that is always engaged.
What’s more, Facebook will continue to monetize its network with higher ad dollars and better sell-through rates. This will help it generate better-than-average returns on capital for decades to come, even if user growth slows.
It's quite amazing just how many guru investors are on the Facebook bandwagon. David Tepper (Trades, Portfolio) has 10% of his assets under management in Facebook, joining Andreas Halvorsen (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Steve Mandel (Trades, Portfolio), Frank Sands (Trades, Portfolio) and Chase Coleman (Trades, Portfolio) with sizable positions in the company. I find it hard to justify buying at 10 times sales or 27 times earnings right now, but if the growth continues, today’s price could look like a sharp discount.
Disclosure: I am not long or short any stocks mentioned in this article.
