Facebook Is Worth $150, Not $67

| About: Facebook (FB)

Summary

A provide a rebuttal to a recent article with a $67 price target on Facebook.

I conducted a DCF calculation, looked at multiples of similar companies and examined the technical outlook.

I found that Facebook is undervalued at its current price.

This article is a rebuttal to a recent article on Facebook (NASDAQ:FB) where the author put a $67 price target on the stock, which is nearly 48% below its current price. Based on a DCF calculation, a comparison of cash flow multiples of similar companies and the current technical outlook, shares of Facebook are undervalued at their current price.

User Trends

Facebook has a strong underlying business built upon a solid foundation as the No. 1 website based on website traffic data. For June total visits were 28.885 billion and for September they were 26.92 billion, which is a decline of 6.80%. This could be a bad thing if daily active users were to show a decline in the upcoming earnings report. However, given the historical trends in daily active users, I believe the decline in website traffic is just a temporary blip.

Some investors are worried that Snapchat (Private:CHAT) will continue to be more popular that Instagram or Facebook. However, I believe that is OK given Facebook has consistently posted record quarter after record quarter. The app leader board shows that Snapchat is ranked third, while Facebook Messenger, Instagram, Facebook and Whatsapp are ranked 5th, 6th, 7th and 22nd, respectively. A question for investors to think about: Would you rather have the 3rd ranked app and nothing else, or would you rather have a portfolio of the 5th, 6th, 7th and 22nd ranked apps?

User Trends

As you can see in the following two charts, daily active users and mobile daily active users have continued to grow worldwide.

Click to enlarge

[Facebook earnings report]

Click to enlarge

(Facebook earnings report)

When looking at Facebook the most critical item to look at is revenue in the United States and Canada. As the above daily active user chart shows, United States and Canada make up the smallest portion. However as the chart below shows, the United States and Canada account for 50% of revenues for Facebook, which makes this a very important group to look at. The table below shows that daily active users as a percentage of monthly active users have been very steady over the past four quarters and unless this stability breaks down there should be very little worries about advertising revenues for Facebook.

US & Canada Revenue

DAU

MAU

DAU/MAU

Q3 2015

$2,256.00

167

217

76.96%

Q4 2015

$2,987.00

169

219

77.17%

Q1 2016

$2,740.00

173

222

77.93%

Q2 2016

$3,212.00

175

226

77.43%

Click to enlarge

Click to enlarge

(Facebook earnings report)

The final item I noticed was the seasonality of advertising revenues where the first quarter is the low point for each year and advertising revenues increase q/q the rest of the year. As the above chart shows the third and fourth quarters have historically been the quarters that post the highest advertising revenues. I believe with this being an election year combined with the seasonality of advertising revenues, Facebook is set up for a big earnings beat and calling for a $67 price target I think is not a good idea.

DCF Calculation

To determine the upside opportunity for Facebook, I conducted a discounted cash flow calculation (table below) and found that shares of Facebook have a fair value of $150.67/share, which is 16.99% above the current price. For my calculations, I used data from Facebook financials on Gurufocus, growth data from Zacks and to determine the discount rate and terminal growth rate, I used the following calculators.

Discount rate calculator

Terminal Growth calculator

  • CFFO/Share: $11200/2904 shares = $3.86 CFFO/share
  • LT Debt/Share: $0
  • Proj. Long-term growth rate: 31.30%
  • Adjusted- Growth Rate:
  • Terminal growth rate: 3.62%
  • Discount rate: 7.81%

Calculator Assumptions

  • Cash flow grows for next five years.
  • After that, growth levels off to the terminal rate for 15 years.

FB

DCF Calculations

CF/Share

PV

Year 1

1

5.06

$4.70

Year 2

2

6.65

$5.72

Year 3

3

8.73

$6.97

Year 4

4

11.46

$8.48

Year 5

5

15.05

$10.33

Year 6

6

15.59

$9.93

Year 7

7

16.16

$9.54

Year 8

8

16.74

$9.17

Year 9

9

17.35

$8.81

Year 10

10

17.98

$8.47

Year 11

11

18.63

$8.14

Year 12

12

19.30

$7.83

Year 13

13

20.00

$7.52

Year 14

14

20.72

$7.23

Year 15

15

21.47

$6.95

Year 16

16

22.25

$6.68

Year 17

17

23.05

$6.42

Year 18

18

23.89

$6.17

Year 19

19

24.75

$5.93

Year 20

20

25.65

$5.70

Year 1-5 Growth Value

$36.20

Terminal Growth Value

$114.48

LT Debt/share

$0.00

Value

$150.67

Current Price

$128.79

Upside/Downside

16.99%

Click to enlarge

Multiple Comparisons

When looking at Facebook, one item that always comes up is the high multiple on the stock. As you can see in table 1 below, Facebook trades at the highest price/CFFO multiple compared to similar companies like Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Twitter (NYSE:TWTR) and LinkedIn (NYSE:LNKD). However, I believe that Facebook deserves this higher multiple because it has the highest projected future growth.

Table 1

Price

CFFO

Shares

Price/CFFO

LT Growth Est

FB

$128.79

11200

2904

33.39

31.30%

GOOG

$796.82

28984

696.8

19.16

16.41%

TWTR

$16.89

578

698.3

20.41

15.00%

LNKD

$190.65

1001

134.1

25.54

27.99%

Click to enlarge

(CFFO data from Gurufocus & Growth Data from Zacks)

To show that Facebook deserves to trade at its high multiple I applied a simple approach. In the first column of table 2, I took the Facebook growth rate and divided it by the growth rate of each of similar company I looked at. To show how I calculated, here is the calculation for Google [31.3%/16.41% = 1.91]. In theory, when comparing Facebook to Google, it should trade at a valuation that is 1.91x higher all else being equal. For the middle column of table 2, I took the value from column 1 and multiplied it by the price/CFFO for each similar company referenced in table 1, to arrive at a theoretical price/CFFO multiple that FB should trade at based on its growth compared to that specific similar company. Continuing with my example using Google, the calculation is as follows: [1.91*19.16=36.54]. Finally, for the third column I multiplied the value from the middle column by the $3.86/share in CFFO/Share that Facebook has to arrive at a fair value. When looking at the table below, you can see that shares of Facebook should be trading higher based on a comparison to similar companies.

Table 2

FB Growth Ratio comparison

FB theoretical price/CFFO multiple

Estimated FB Price: Theo Price/CFFO Multiple * FB CFFO/share

GOOG

1.91

36.54

$140.92

TWTR

2.09

42.58

$164.22

LNKD

1.12

28.56

$110.15

Average

$138.43

Click to enlarge

Technical Outlook

The final item I will be looking at is the technical picture for Facebook, which shows that the stock is still in a solid uptrend. As the following chart shows, Facebook has been inside an ascending channel for over a year and there are no signs of showing that it will break below that channel. I have extrapolated the channel trend lines out into the future and as you can see, the channel is slowly getting smaller and smaller. This will eventually lead to a point where Facebook either breaks out above the upper part of the channel or breaks down below the lower part. The upper part of the channel and the lower part of the channel meet right around $167/share (blue line), which is my price target based on the technical outlook. As long as Facebook does not break below the bottom of the channel prior to the channel lines meeting, I see no reason why from a technical perspective that investors should sell Facebook or think it is going to $67.

Click to enlarge

[Chart from ThinkOrSwim Platform]

Closing Thoughts

In closing, based on my DCF calculations, multiple comparisons and the technical outlook, I strongly believe Facebook is worth $150+/share. In my opinion, short of another great recession occurring, I believe there is no way will Facebook fall to $67/share. The only way I see Facebook going to $67/share is if they were to conduct a stock split.

Disclaimer: See here.

Disclosure: I am/we are long FB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.