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Stock Spotlight

Investors friend Facebook shares

Recent Price
$188
Dividend
$0.00
Yield
0.0%
P/E Ratio
33
Shares (millions)
2,956
Long-Term Debt as % of Capital
0%
52-Week Price Range
$188.90 - $123.04

Facebook ($188; FB) offers a rare combination of massive scale, massive growth, and increasing profitability. Few companies are better positioned to capitalize on the tectonic shift in ad spending toward the internet and away from television.

About 98% of Facebook’s revenue comes from online advertisements, mostly viewed on mobile devices. The Facebook mobile application accounts for 78% of the company’s revenue, compared to 7% from its Instagram application (geared toward sharing pictures), and about 13% from its desktop website.

Facebook’s number of daily active users rose 16% in the past year to 1.37 billion, roughly 18% of the world’s population. Daily users surged 29% in Asia, which now boasts 2.6 times more users than the U.S. and Canada combined.

The shares have rallied 55% in 2017, well ahead of the S&P 500 technology sector’s 38% gain and the broad index’s 20% advance. We see a long runway for further appreciation and rate the stock a Focus List Buy and a Long-Term Buy.

Growth justifies rich valuation

For the 12 months ended September, per-share profits, operating cash flow, and free cash flow surged more than 75% on revenue growth of 48%. Cash assets swelled 46% in the past year to $38.29 billion, or $12.95 per share. Operating profit margin has expanded by more than 250 basis points in eight consecutive quarters, while returns on assets, equity, and investment have also marched steadily higher.

Growth for ad prices has accelerated in three straight quarters, most recently jumping 35% for the three months ended September. Management says advertising demand is growing faster than supply, increasing prices for the ads it auctions off.

For investors, that growth comes at a price. Facebook’s Quadrix® Value score of 36 is lower than any of our other recommended stocks. Although the shares look pricey from many angles, they become more reasonably valued when you consider Facebook’s growth prospects and cash position.

Facebook trades at 33 times trailing earnings, or 39% above the average S&P 500 technology stock. Based on its estimated 2018 profits, projected to grow 13%, Facebook has a forward P/E of 27, a 29% premium to its sector. Excluding net cash of $13 per share lowers Facebook’s forward P/E ratio to 25, or 20% above its sector average. But Facebook is expected to increase per-share profits at an annual clip of 28% over the next five years — fewer than 10% of stocks in our research universe are projected to grow at a faster pace. The stock’s PEG ratio, which divides P/E by long-term growth, is 1.1, well below the sector average of 2.0. By this measure, Facebook looks cheaper by than about 85% of our research universe. Even taking a more cautious estimate of future profit growth, such as 20%, Facebook has a reasonable PEG of 1.5.

Encouragingly, analyst estimates are steadily climbing. In the past 16 quarters, Facebook has topped the consensus profit estimate 16 times and the sales estimate 15 times.

An annual report for Facebook Inc. is available at 1601 Willow Road, Menlo Park, CA 94025; (650) 543- 4800; investor.fb.com.

 

Facebook

 
Quarter
Per-Share Earnings
Sales Change
Quarterly Price Range
P/E Ratio Range
Sep '17
$1.59
vs.
$0.90
47%
$184.25
-
$161.56
39 - 35
Jun '17
1.32
vs.
0.78
45%
175.49
-
144.56
42 - 35
Mar '17
1.04
vs.
0.60
49%
153.60
-
136.08
42 - 37
Dec '16
1.41
vs.
0.79
51%
137.18
-
114.00
45 - 37

 
Year (Dec.)
Sales (Bil.)
Per-Share Earnings*
Per-Share Dividend
52-Week Price Range
P/E Ratio Range
2016
27.64
$3.49
$0.00
$133.50
-
$89.37
38 - 26
2015
17.93
2.28
0.00
110.65
-
72.00
49 - 32
2014
12.47
1.77
000
82.17
-
51.85
46 - 29
2013
7.87
0.93
0.00
58.58
-
22.67
63 - 24

 
Quadrix Scores†
Overall
Momentum
Value
Quality
Financial Strength
Earnings Estimates
Performance
91
97
36
100
92
78
78

* Earnings exclude special items.
NA Not Available.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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Stock Spotlight

Investors friend Facebook shares

Wednesday, January 10, 2018

Facebook ($188; FB) offers a rare combination of massive scale, massive growth, and increasing profitability. Few companies are better positioned to capitalize on the tectonic shift in ad spending toward the...

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