E Facebook: Growth Continues Despite Doubts

In this article, we will analyze Facebook (FB). The social media giant behind Instagram, Messenger, WhatsApp, and its core Facebook platform is currently the fifth-largest American company, valued at around $700 billion.

Facebook has been in controversial headlines over the years. Criticism would usually go towards its weak data and user protection policies. However, during the past few months, Facebook has been scrutinized for how it treats hate speech on its site, causing a substantial number of major advertisers to walk away from the company's platforms temporarily.

Investors and analysts were rightfully worried by this news, as combined with overall reduced ad spending amid COVID-19, the company's revenues would be adversely affected.

Facebook released its Q2 earnings a couple of weeks ago, delivering a surprising 10% revenue growth, despite its several challenges.  Further, its underlying business grew significantly, with daily active users (DAUs) being 1.79 billion on average and monthly active users (MAUs) being 2.70 billion for the quarter. Both figures recorded an increase of 12% year-over-year.

This growth rate becomes even more impressive considering that nearly 40% of every human being alive uses one of the company's apps at least once a month.

We believe that the company exhibits some of the healthiest financials on Wall Street. Its balance sheet can withstand any economic environment, proving ample liquidity at any time. Facebook holds a massive $68 billion cash position and no long-term debt. The war chest was built by the company's consistent profitability, with its net profit margins consistently ranging between 30%-40%. We assess that the company holds enough firepower to withstand any potential future fines (similarly to its past ones), keep investing in its future ventures (such as AI and AR through its Oculus Rift brand), as well as return capital to shareholders.

Regarding capital returns, management repurchased $2.6 billion of capital stock in the first half of FY2020, an increase of 52% over the $1.7 billion repurchased in H1-2019. The amount is relatively minor based on Facebook's $700 billion market cap. However, buyback acceleration points towards more capital being returned in the future. Stock repurchases greatly benefit Facebook shareholders as the stock is trading at an attractive valuation as well. At only 28.4 times its forward earnings, Facebook is one of the cheaper stocks in the technology/communication sector. Let us remind that Facebook's 5-year revenue CAGR (compound annual growth rate) stands at a jaw-dropping 38.7%, including the recent weaker quarters. As the company is regularly scrutinized, shares have failed to attract higher valuation multiples, with many funds deliberately avoiding the stock, treating it as a vice investment.  This is not the case for all institutional investors, however.  As an example, SRS Investment Management holds a position in Facebook.

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William K. 1 month ago Member's comment

Certainly the money aspect of the growth of facebook is impressive by any standard. It is indeed an impressive organization. So the financial part is making a whole lot of profit.

My concern was not mentioned, which is that the information gathered will be far more than TicTok, and the ultimate use of that information will not benefit us any more than the feared uses of data by the Chinese government. The smell of profit will be too much to resist, I think.

Michael Monk 1 month ago Member's comment

I've had the identical concerns. I trust Facebook even less than Tiktok.