With nearly $95 billion in revenues in its last four quarters, Facebook (FB) is a revenue-generating machine. Moreover, the company is massively profitable, as Facebook generated an astounding $33.74 billion in net income in the same time frame. However, the company's strong value narrative is just one side of the equation, as Facebook is also a compelling growth story. Despite the company's massive size and influential market position, analysts expect Facebook's revenues to increase by about 20% this year. In addition, the company's growth path looks sustainable, as revenue coupled with income growth should continue to expand going forward. Facebook is trading at about 22 times "forward" (next year's) consensus analysts' EPS projections. This valuation is exceptionally cheap for a dominant market-leading company likely to generate substantial growth in future years.
Facebook: Long-Term Chart
Source: nasdaq.com
Facebook's stock has been a favorite of ours for years now. The company's shares have appreciated essentially 20-fold since Facebook's post-IPO lows. While some transitory declines over the years occurred, each downdraft turns into a compelling buying opportunity. The bottom line is that Facebook keeps growing.
Let's Look at Some Numbers
Source: investor.fb.com
Yes, that is 3.45 billion active monthly users or monthly active people ("MAP"), as Facebook likes to call them. What's the family? It's any registered and logged-in user of Facebook, Instagram, Messenger, or WhatsApp. Aside from the sheer number of users, what's remarkable is the continuous, steady growth. YoY Facebook's family MAP growth increased by about 15.4%, eclipsing the prior 12-month's growth of 11.2%.
Source: investor.fb.com
In addition to user growth, "family" average revenue per person ("ARPP") continues to expand also. Last quarter's ARPP came in at $7.75, a whopping 28.5% increase on a YoY basis.
Source: investor.fb.com
User growth coupled with revenues per user increases translates into massive revenues for Facebook. The company put up 48% YoY revenue growth last quarter. Yes, the coronavirus effect may have caused some disruption in Q1 2020. However, if we look back to Q1 2019, Facebook's revenues came in around 75% higher last quarter. This remarkable growth illustrates the company's unique position as the undisputed social media juggernaut. Facebook is a highly monopolistic style company with an incredible tenacity to effectively monetize its platforms.
Source: investor.fb.com
One could make an argument that Facebook is remarkably efficient. While the company's revenues surge, Facebook's costs of doing business remain relatively subdued. While the company's R&D costs and cost of revenues remained roughly constant, Facebook's general & administrative, and marketing & sales costs declined as a percentage of revenues from prior quarters.
Source: investor.fb.com
Facebook's way of doing business translates into massive income generation. Last quarter the company delivered nearly $11.4 billion in operating income. This immense number represents a 93% YoY increase for the company. Moreover, if we look back at the prior year, the company's operating income increased by a massive 245% from Q1 2019.
Source: investor.fb.com
As Facebook's revenues grow, the company's operating margin continues to expand. In Q1, the company reported a massive 43% operating margin, second only to the 2020 Q4 record of 46%.
Source: investor.fb.com
Facebook delivers a combination of growing revenues and controlled costs. This dynamic leads to remarkably high-profit margins, and the result is a great deal of net income for shareholders. The company delivered an enormous $33.74 billion in net income in its last four quarters of operations. This immense profit equates to a net income margin of approximately 35.5%. This incredible profitability makes Facebook one of the most prominent income-generating machines on the planet.
Source: investor.fb.com
On an EPS basis, Facebook delivered $11.69 in its last four quarters of operations. $11.69 in EPS puts Facebook's valuation at about 29 times trailing earnings. However, the company is likely to become increasingly more profitable in the future.
Source: seekingalpha.com
While consensus estimates call for $13.07 in EPS this year, analysts expect Facebook to deliver $15.09 in 2022. This number puts the company's forward valuation at about 22 times 2022's consensus expectations, which is relatively inexpensive for a company anticipated to increase revenues by around 20% this year.
Source: seekingalpha.com
Moreover, analysts project sustainable revenue and EPS growth for Facebook for some years as the company advances. Analysts expect Facebook to deliver around $206 billion in revenues and over $23 in EPS in 2025.
Source: nasdaq.com
In addition to Facebook's strong profitability and robust growth, the company has a voracity for crushing analysts' EPS forecasts. The company managed to top consensus EPS figures by an average of 31.25% in its last four quarters. Let's take a conservative approach and imagine that the company can surpass consensus analysts' figures by roughly 15% in upcoming years. A 15% EPS beat would result in an EPS of $17.35 in 2022. $17.35 in EPS translates to a forward valuation of only 19.6, remarkably cheap in my view. Moreover, a 15% EPS beat relative to 2025's $23.09 projections would amount to roughly $26.67 in EPS for the company and its shareholders.
The Bottom Line
We have been long Facebook for a long time, the stock has done very well for us over the years, and we continue to like it going forward. Facebook has enormous revenue and earnings growth potential. Consensus analysts' projections suggest that the company should generate over $23 in EPS in 2025. However, we see that Facebook has a distinct tenacity for surpassing analysts' estimates. Thus, the company could earn around $26.67 per share in 2025. Provided that the company's forward valuation remains at about 22 to 25 times EPS, Facebook's stock price should reach approximately $587-667 by mid-2023 to early-2024. This appreciation in share price represents a return of roughly 73-96% from current levels.
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