Facebook Stock Shows Every Sign Of Being Fairly Valued
- By GF Value
The stock of Facebook (NAS:FB, 30-year Financials) is believed to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $330.35 per share and the market cap of $936.7 billion, Facebook stock appears to be fairly valued. GF Value for Facebook is shown in the chart below.
Because Facebook is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 29.4% over the past three years and is estimated to grow 21.25% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Facebook has a cash-to-debt ratio of 5.53, which ranks in the middle range of the companies in Interactive Media industry. Based on this, GuruFocus ranks Facebook's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Facebook over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Facebook has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $94.4 billion and earnings of $11.69 a share. Its operating margin of 40.42% better than 94% of the companies in Interactive Media industry. Overall, GuruFocus ranks Facebook's profitability as strong. This is the revenue and net income of Facebook over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Facebook is 29.4%, which ranks better than 79% of the companies in Interactive Media industry. The 3-year average EBITDA growth rate is 19.6%, which ranks in the middle range of the companies in Interactive Media industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Facebook's ROIC was 41.05, while its WACC came in at 9.44. The historical ROIC vs WACC comparison of Facebook is shown below:
In closing, the stock of Facebook (NAS:FB, 30-year Financials) gives every indication of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Interactive Media industry. To learn more about Facebook stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
