The Facebook IPO was held exactly 5 years ago. With Facebook valued at a whopping $420 billion, is FB stock still a good buy?
Today, May 18, marks 5 years since the Facebook Inc. (NASDAQ:FB) IPO. The extremely popular IPO was followed by multiple scandals of misleading investors. A rocky first-year post the IPO saw the value of Facebook shares plummet by more than 50% to touch a low of $18 a share. However, the bounce out of the $18 lows, which it hit on August 31, 2012 has seen the FB stock price rise steadily in a bull run which has now lasted for nearly 5 years now. While there have been phases of marginal pullbacks, the long-term trajectory has clearly been upwards. Facebook stock closed the last trading session at a price of $144.85, down 3.3% for the day, but implying an absolute gain of 702% from its August 31, 2012 low. On an annualized basis, FB stock has returned an impressive 55% over the last 4 years and 9 months. With a market capitalization now hovering around the $420 mark, is Facebook stock still a good buy?
Facebook's $5 Trillion Impact
A recent post on CNBC presents some analysis which highlights some important facts with respect to the impact of the social networking platform. As per the analysis, the opportunity cost of people spending time on Facebook is a whopping $5 Trillion. Yes, you read that right. According to the research, "If everybody in the U.S. and Canada spent their time working a minimum wage job instead of "liking" and "friending" each other, they could have increased productivity by about $1.03 trillion, with $5 trillion more possible across the globe."
And, well that's assuming a minimum wage rate and 30 minutes of Facebook usage each day. Both of these assumptions happen to lean towards conservatism, with Facebook users spanning a much wider demographic than just 'minimum wage workers' and Facebook accounting for at least 50 minutes of an average user's day. While this can also be seen as a measure of wasted productivity, the numbers tell a clear story. Facebook is a sticky product and has become a huge giant in our internet-centric world with its MAUs (Monthly Active Users) surpassing the population of any individual country.
The story of Facebook stock can be summarized in just one phrase, 'phenomenal growth.' The Menlo-park, California-based company generated $30.3B in revenue over the last twelve months, which saw 38.9% of it flow down to the Net Income line, which came in at $11.77B for the period. That's up from revenue of $5.09B in 2011 and a profit of $53M. A near 6x growth in topline and a 222x growth in net income. And, that's come over a period of 5 years. Phenomenal growth, any way you look at it.
Playing FB Stock From Here
With the market capitalization approaching the $420B mark, Facebook is now among the top 5 biggest technology companies. The important question to ask is, can Facebook stock still deliver multi-bagger like returns? Should investors use the latest pullback in price to go long FB stock? The latest pullback is a product of a broader market sell-off as well as allegations by the European Commission accusing Facebook of providing 'misleading information' with respect to its 2014 acquisition of Whatsapp. While these events might drag FB stock lower in the near-term, they don't alter the long-term story, whatsoever. The EC won't reverse the clearance granted for the Whatsapp acquisition, and the $110M fine will be a hit Facebook can live with, from a purely financial perspective.
As we have iterated on numerous occasions in the past, Facebook will continue to ride the wave of growth in Mobile ad dollars apart from leveraging the rising engagement of its Instagram platform, which on a standalone basis, could be worth more than $50B. Mobile and Instagram will continue to be growth drivers over a multi-year timeframe, which should continue to fuel its long-term growth.
FB stock currently trades at a TTM PE multiple of 36.3x, and while that's not exactly a value play, it is cheap when you consider the fact that the company has consistently been growing its bottom line in excess of 50% YoY for the last few quarters. While Facebook stock might not deliver the multi-bagger returns it has given in the past, the stock is still a fundamentally solid long term play. Not surprisingly, FB stock is among our top stock picks from the tech sector, which have outperformed the NASDAQ by a solid 132%.
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