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It Looks as If Facebook Stock Could Be the Best of the FAANG Stocks

Will Ashworth

Facebook (NASDAQ:FB) is having a great recovery year in 2019. Up 40.2% year to date through August 20, Facebook stock is closing in on $200, a mere 16% from its all-time high of $218.62. 

It Looks as If Facebook Stock Could Be the Best of the FAANG Stocks

Source: Wachiwit / Shutterstock.com

That’s got me wondering if Facebook stock the best FAANG stock to buy at the moment. To help me, I’m going to lean on my good friend, free cash flow, to determine the answer.  

For those of you that are unfamiliar with free cash flow, it is the cash a business generates that’s not required to carry on routine operations. Free cash flow can be allocated for dividends, share repurchases, acquisitions, debt repayment, and keeping it in the bank for a rainy day. 

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Free Cash and Facebook Stock

Facebook’s current free cash flow in the trailing 12 months ended June 30 is $17.9 billion

In the first six months of the year, Facebook used $1.65 billion to repurchase 9.3 million shares, an average price paid of $177.42, a return on investment of 3.6% based on a current share price of $183.81. Facebook paid no dividends during the quarter and doesn’t intend to in the future.

During the first six months of the year, it made no material acquisitions. As for debt, it has a $2 billion credit facility, but none of it has been drawn.

It finished the second quarter with $48.6 billion in cash, cash equivalents, and marketable securities, $3.9 billion of which was added in the past six months. 

A useful metric for determining a stock’s relative value is free cash flow yield, which is defined as free cash flow divided by enterprise value [market cap plus debt minus cash]. The company’s current enterprise value is $483.6 billion. 

Its free cash flow yield is 3.7%. Value investors consider 8% to be the bare minimum. However, for a growth stock like Facebook, 3.7% isn’t outrageous. 

How do the other FAANG’s rate? Here’s a chart.

FAANG Free Cash Flow Yields

Company Free Cash Flow (TTM) Enterprise Value Free Cash Flow Yield (%) Facebook  $17.9B $483.6B 3.7% Amazon (NASDAQ:AMZN) $22.1B $908.1B 2.4% Apple (NASDAQ:AAPL) $58.3B $964.5B 6.0% Netflix (NASDAQ:NFLX) -$3.1B $138.5B N/A Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) $27.4B $703.8B 3.9%

The Conclusions

Anyone who follows Netflix knows that it will have negative free cash flow for the foreseeable future because it spends so much money on content for its video streaming service. Earlier this year Netflix did state that free cash flow should improve in 2020 and beyond. However, it’s had negative free cash flow every year since 2011. 

While I like Netflix stock , negative free cash flow eliminates it from contention as best FAANG stock to buy now.

Although Amazon has the lowest free cash flow yield at 2.4%, the fact that it has three major revenue streams: e-commerce, Amazon Web Services (AWS), and advertising, provides a strong pathway to higher free cash flow generation and overall revenue growth.

I believe 2.4% isn’t terrible given the upside potential of its business. Although I’m a big fan of Jeff Bezos and Amazon stock, some of Amazon’s business practices are less than friendly. For this reason, I’ll pass on AMZN. 

While Alphabet’s got the second-highest free cash flow yield at 3.9%, the fact that it’s still a one-trick pony with advertising as its chief revenue generator suggests it doesn’t warrant a higher ranking than Amazon. Therefore, it also doesn’t make the cut. 

As for Apple, it’s been the value FAANG stock for at least the last two years. Now that its services revenues are coming on and iPhone sales appear to have plateaued, it will have to continue to build the services side of its business. 

The latest earnings report suggests its plan for growth is working, but investors are failing to recognize this fact. Ultimately, I believe that Tim Cook’s strategy will be successful. At a free cash flow yield of 6.0%, there’s few better tech buys at the moment. 

The Bottom Line on Facebook Stock

The privacy issues nagging Facebook will continue to act as a headwind on its stock price. That said, at a 3.7% free cash flow yield, you’re getting Facebook stock at a reasonable price at the moment despite a 40% YTD increase.  

For me, I’d rank the best FAANG stocks to buy in this order:

Apple Amazon Tie between Facebook and Alphabet Netflix

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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