Facebook: Good Company But Not A Great Stock!

  • Facebook has successfully monetized mobile.
  • Solid revenue growth marks Facebook in 2013.
  • At current valuations, FB stock is overpriced.

Facebook Valuation

Social Media Stocks like Facebook & Twitter have been the hottest internet stocks of 2013. Today we focus on Facebook (NASDAQ:FB), the social media giant. Will Facebook's exponential growth continue in 2014, or is a correction long due?

Facebook revenues grow with successful mobile monetization

Facebook had a turn-around in its financials this year as compared to the dip in 2012, especially due to the successful monetization of its mobile user base. Year on year growth in 2013 averaged at 50%, while operating margin went back to its pre IPO levels of 37% in the recent quarter. The road ahead is also filled up with opportunities, with Facebook’s new launch of video ads, which is expected to generate around 15%-20% of additional revenue. The company has the largest worldwide active user-base of 1.2 billion with maximum engagement as compared to its peers. However, the question remains whether Facebook can successfully monetize it to its benefit.
Revenue Growth for Facebook
Net income and Operating margin for Facebook

Facebook financials: a detailed look

On the revenue front Facebook is growing at a rate lower than its 3 year compounded annual growth rate. However, the company is growing at a far higher rate as compared to industry average growth numbers. Moreover, both its net income margin and operating margins are at higher levels than its 3 year average. So overall, our revenue and accretion score for Facebook stands at 4.

Facebook Income statement Score: 4/5

Facebook Valuation Analysis

The company is currently trading at an annualized price to earnings ratio of 138, which is way above industry average. Also the price to sales ratio of 21.3 & price to book ratio 11.9 currently is too high for comfort. Therefore, our rating for relative valuation as compared to industry average stands at 2.

Our Facebook Relative Valuation Analysis (as compared to industry analysis score): 2/5

Facebook Free Cash Flow, ROE and ROIC Analysis

At a return on equity (ROE) of 13%, and Return on invested capital (ROIC) of 30%, the company has provided good returns to its shareholders and other investors. Facebook also generates a healthy free cash flow, with a free cash flow to sales margin of 33% in the latest quarter. We rate this key parameter at 4.2.

Our Facebook Free Cash Flow, ROE and ROIC Score: 4/5

Overall Weighted Score for FB stock: 4/5

Facebook Valuation based on future estimates

Facebook Relative Valuation (M: Millions of USD)
FB revenue for 2012 $5,089.4M
Expected revenue for 2013 $8,143.0M
Current price to sales ratio based on expected 2013 revenues 17.41
Expected revenue for 2015 $20,846.1M
Current Market Cap of FB $141,810M
Forward price to sales ratio 6.80
Estimated price to sales ratio 5.00
Expected Market Capitalization $104,230.70M
Expected stock price $51.96

For the analysis, we assume Facebook’s growth at 60%. Although it might sound like a high number to some, and surely a challenging number for Facebook to achieve, we feel Facebook has good growth opportunities and can continue to generate the current growth numbers few years into the future. That being said, even at an estimated growth of 60%, Facebook forward PS multiple of 6.8 is too high for comfort. Using an estimated PS ratio of 5 for the industry, we are getting a fair price of $52 per share, showing a downside risk of 10% from its current price of $58.23 a share.

With our financial analysis score of 4 out of 5, where 5 stands for the best, Facebook shows a picture of solid growth and healthy profitability. However, we feel that these growth expectations have already been factored into the current price levels. Valuations levels are too high for investment at this time, as indicated by our low relative valuation score of 2, which is below the acceptable level of 3. The company will have thus to over perform the analysts’ expectations to gain further valuations. Q4 results are keenly awaited by investors. View our Facebook stock analysis.

To see Facebook’s latest stock price movement, click here (NASDAQ:FB)

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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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Comments on this article and FB stock

fkshen
FB is going down to $44 in a month.
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