Why Facebook Stock Is Very Cheap
[Editor’s note: This is an updated version of a story published last week.]
I hate Facebook (NASDAQ:FB), but I’m about to tell you why buying FB stock right now may be the easiest investment decision you can make.
I hate Facebook because it monetizes my life, because it’s killing journalism and because its management doesn’t seem to care about the future of humanity or the planet. They also don’t seem to care about your data, sharing it with Big Tech companies as they see fit.
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But this week, despite the calls in recent months to delete Facebook, I learned that most people don’t seem to hate FB.
Our community group’s Christmas party is at the same church, on the same date and at the same time every year. But this year it was at a nearby storefront. The only notice of the change was through a Facebook posting.
The point is that the proclamations of Facebook’s death and the demise of FB stock may be exaggerated, as use of the social network is stil the norm.
Look at the Numbers
At its Dec. 19 early morning price of $141.71, Facebook stock has a market cap of about $405 billion. FB stock is down one-third from its July peak of $215 per share, and it now has a price-earnings multiple of 21, in line with that of the market.
But Facebook’s performance is not yet in line with the market.
Analysts on average still expect FB to report $16.42 billion of revenue for the current quarter. If the consensus estimate proves to be correct, and Facebook’s stock price doesn’t change much in the next 18 days, the final 2018 price-sales ratio of FB stock would be less than 7.5. The company’s 2018 revenue will have increased by 37% to $55 billion. Analysts’ consensus 2018 earnings per share estimate is $1.42, flat compared with 2017.
What Facebook has suffered from, so far, is bad publicity, and it has invested billions of dollars to address the issue. What it hasn’t suffered from, yet, is a reduction of its business, which is still growing.
Look at the Assets
Investors continue to ignore Facebook’s infrastructure, a network of cloud data centers and optical network cables that make it one of the world’s five “Cloud Czars” which control the world’s communications. Facebook has more cloud infrastructure than AT&T (NYSE:T), Verizon Communications (NYSE:VZ), or any of the world’s national phone networks.
Facebook began investing in the cloud before it had the cash flow to sustain that investment, while some giant companies sat on their assets. Facebook’s challenge is to place profitable services on its network. Eventually, it could offer the services of other companies on its network.
Facebook pays nothing for the data that it obtains. FB doesn’t share any of the revenue that it obtains by monetizing its data. It owns, outright, all the assets that process that data. At the end of September, FB had over $40 billion in the bank and no debt.
By contrast, the geniuses at AT&T, who could have easily replicated Facebook’s cloud network a decade ago but decided not to invest in doing so, now have long-term debts of $168 billion on a market cap of $217 billion. Oh, yes, they have that sweet, sweet 6.73% dividend yield, but the shares are down 22% in the last year, while Facebook stock has fallen just 19% during that time.
The Bottom Line on FB Stock
Investors are underestimating the value of Facebook’s assets. They’re assuming that Facebook’s business is going to decline because of the negative publicity FB has generated from its ham-handed way of doing business. They assume the decline is coming because of writers like me, the guy who missed the Christmas party.
But negative speculation is still speculation. Assuming something will happen before the facts are known will cost you money, whether you’re assuming strength or weakness.
If Facebook hits its earnings estimates in January, Facebook stock price is going to explode upward. If FB’s results come in below expectations, Facebook stock price is not going to explode downward because it has physical assets and enough cash to adjust its business model.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.
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