Rating Facebook an Outperform
Facebook is another company that looks overvalued by standard measures of valuation (P/S of 19.75 and a P/E of 100.64). The stock is clearly priced at a premium, but for good reason: the company's culture/leadership, financial performance, and continued innovation are all top notch. Facebook is another candidate for the Pencils IRA Project, and for now this CAPS pitch gives a basic overview of my feelings about the company.
I think there is a good chance Facebook will be a $300 billion+ company by 2019, in which case the stock would likely outperform the market by a sizable margin. Here are the top four reasons I think Facebook is poised for stellar long-term performance:
1. Mark Zuckerberg is 29 years old. More than a decade younger than Elon Musk. 20 years younger than Jeff Bezos. And yet, Zuckerberg has a 97% employee approval rating and Facebook receives a 4.6/5 rating on Glassdoor. Zuckerberg, who hasn't even been on the planet for three decades, oversees one of the world's premier and innovative company cultures. I think this bodes well for Facebook's long-term outlook.
2. Facebook is a cash machine. The company produced nearly $3 billion in free cash flow in 2013, up from roughly $400 million in 2010. As of December 2013, the balance sheet had $11.45 billion in cash with $476 million in debt.
3. Sales, earnings, and cash flow have both grown at average annual rates over 40% over the past four years. The stock is trading at a premium today, but I would expect nothing less given the growth of the business and its bright long-term prospects.
4. 1.23 billion users. Through internal product development and acquisitions, Facebook is finding ways to reach and monetize current and new customers. In many ways, Facebook has just scratched the surface of what it can accomplish with such a massive (and growing) base of users.
People laughed when Yahoo attempted to buy Facebook for $1 billion in 2006. Many thought Yahoo was nuts, because "social media is just another fad." 8 years later, Facebook is worth $157 billion, more than 4.5 times Yahoo's value today.
As Facebook continues its innovative streak in the realm of social media, virtual reality systems, and helping connect the world, I expect the company's exceptional performance to continue for the next five years and beyond.