Facebook Stock Analysis Reveals An Attractive Opportunity

  • Facebook has turned in a strong performance in 2014, delivering strong growth on every financial and operational metric.
  • The only measures which saw a decline were Facebook Valuations, which has opened up an investment opportunity.
  • We estimate a reasonable one year Facebook target price of $89.8, implying a 12.4% upside from the last traded price.

Facebook (NASDAQ: FB) stock price has moved up by over 14% in the year to date, marginally underperforming the NASDAQ composite. In comparison, S&P 500 gained 14.7% while NASDAQ composite moved higher by 16.13% over the same period.

FB vs Indexes
Source: Amigobulls

The relevant period also saw 4 earnings releases from Facebook, for the 4 quarters of 2014. With the FY 2014 coming to a close with the latest earnings report, an important question to answer is whether or not Facebook is a good buy in 2015. We take a look at the changes in Facebook fundamentals over the last year in comparison to its valuations and stock movement and update our outlook on the stock. Our outlook on the stock is summarized in our Facebook stock analysis video.

Facebook Profitability And Growth Impress In 2014

Facebook revenue grew 58% in 2014, which was further acceleration from the 55% growth in 2013. On the bottomline, the EPS diluted grew by 86% while the Non-GAAP EPS grew by an even better 93%.

$ YoY growth
Revenue 12.47B 58.4%
EPS diluted 1.1 86.1%
Non-GAAP EPS 1.73 92.6%

All in all, Facebook reported strong growth across the topline as well as bottomline.

Moving over to profitability, Facebook registered huge improvements in profit margins at the gross, operating as well as net levels. Facebook’s gross profit margin came in at a whopping 83%. The leverage on the cost of goods sold will be increasingly felt as the revenue base continues to grow in the coming quarters.

Profit margins 2014   YoY change
Gross profit margin 82.7% 6.6%
Operating profit margin 40.1% 4.4%
Non-GAAP operating profit margin 57.2% 8.3%
Net profit margin 23.6% 4.5%
Non-GAAP net profit margin 37.2% 8.3%

Facebook User Engagement Drives Financial Growth

The significant growth in Facebook financials was also accompanied by slowing user growth in FY 2014. The slowdown in user growth was along expected lines, considering the large size of Facebook’s current user base (1.39 billion MAU).

YoY user growth 2013 2014
MAU growth 16.3% 13.4%
Mobile MAU growth 39.0% 25.8%

The growth in mobile monthly active users (MAU) was higher than the overall MAU growth, as Facebook continued its transition from a PC dominant platform to a mobile focused social platform. However, Facebook ended the year 2014 with mobile MAU’s of 1.19 billion, suggesting that the growth in this metric will also plateau out in the coming months. While 2013 was the beginning of Facebook’s transition to mobile, 2014 can be termed as the year of completion of this transition.

On the other hand, Facebook registered strong improvements in its engagement metrics. Facebook ended 2014 with DAU (daily active users) of 890 million. The DAU/MAU ratio is an indicator of user engagement. Facebook reported strong growth in this metric, at an overall level as well as on mobile.

2013 2014 YoY change
DAU/MAU 61.6% 63.9% 2.2%
Mobile DAU/Mobile MAU 58.8% 62.7% 3.8%

Higher Monetization As Facebook Mobile Ad Revenue Rises

Facebook reported strong growth in ARPU (average revenue per user), which went up from $5.18 in 2012 to $9.3 in 2014. The growth in ARPU was majorly driven by rising ad revenue per user. The Ad revenue per user has grown at a CAGR (compounded annual growth rate) of 40% over the last two years.

Facebook average revenue per user 2014

Another encouraging trend was the strong growth in Facebook’s mobile ad revenue per user. Facebook’s mobile ad revenue per user has registered a two year CAGR of over 200%, growing from 69 cents in 2012 to $6.7 in 2014.

Facebook mobile ad revenue per user 2014

The strong growth in mobile ad revenue increased mobile revenue share of total revenue. Facebook generated 65% of its 2014 ad revenue on mobile, a significant increase from 45% in 2013.

Facebook Valuations

The only measures which saw declines over the last year were Facebook stock valuations. The valuation multiples declined inspite of a 14% rally in the stock price, which is an indicator of the improvement in Facebook fundamentals. Facebook PE ratio has declined from 118 to 72.6 over the last one year. Similarly, Facebook price-to-sales ratio has also dropped from 21.7 to 17.7 over the same time period.

Facebook valuations
Source: Amigobulls

Facebook stock is trading at a discount to its average 1 year valuation multiples, as seen in the table below.

Valuations Current One year average Premium/Discount
LTM PE 72.85 84.16 -13.4%
LTM PS 17.94 18.7 -4.1%

The valuations though steep could offer investors to gain as the fundamentals will likely outgrow its current valuations. The fall in valuations coupled with Facebook’s strong performance in 2014 makes the stock an attractive investment as we head into 2015.

Facebook Stock Target Price

Analysts currently estimate Facebook to report FY 2015 Non-GAAP EPS of$1.95 on revenue of $17.13 billion. The estimates and one year forward valuation multiples are summarized in the following table.

Analyst estimate 2015
Revenue 17130
Non-GAAP EPS 1.95
Forward valuations
One year forward price to sales multiple 13.05
One year forward PE ratio 40.97

We arrive at Facebook’s one year target price by using the current analyst estimates and reasonable valuation multiples considering the earnings growth of the company. As per our estimates, Facebook one year target price comes to $89.8, which implies an upside of 12.4% from the Feb 22 closing price.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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