Facebook Is An Inexpensive Growth Stock (But Oculus Was Expensive)

| About: Facebook (FB)
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Summary

There has been quite a bit of news revolving around the company’s purchase of Oculus from a few years ago.

It remains quite dubious whether or not Facebook picked up Oculus for the original stated amount of $2B. All of a sudden that number continues to creep higher.

One has to wonder if the $2B, $3B or $3.5B number that Facebook paid for Oculus was worth it altogether considering the purchase was made almost three years ago.

With the much anticipated Facebook (NASDAQ:FB) earnings call behind us investors have a lot more clarity as to how the company is performing. The key takeaway from the earnings call was that the company said it still expects to spend money on capex in order to grow revenues in the future. This was a complete reiteration of last quarter's announcement which investors sold the stock on and sold it again this time. But after an initial selloff in the name the stock has rebounded and investors should continue to keep both eyes on the prize by continuing to stay in touch with what is going on at the company in general.

There has been quite a bit of news revolving around the company's purchase of Oculus from a few years ago. In a recent restructuring of the Oculus business unit the company has created two different operating units - one centered on mobile virtual reality and the other around PC virtual reality. As part of the restructuring effort Brendan Iribe will no longer be CEO but will head the PC virtual reality unit with Jon Thomason heading the mobile unit but the CEO role remains vacated.

Amid fierce competition in the VR space and Oculus' attempt at streamlining operations, the company has decided to purchase eye-control technology maker The Eye Tribe, or TET. TET develops eye tracking technology which basically moves the screen of a device by following the user's eyes and sells the software to companies so that it can be incorporated in the devices. The value proposition that TET offers is that its technology is the smallest eye tracker on the market, making it less clunky relative to competitors and it doesn't require a power source to operate. The peculiar thing about the acquisition was that just days before it was announced TET sent a letter to its customers basically telling them that it was going to shutter its doors, then in comes Oculus with the purchase. The terms of the deal were undisclosed as far as I can tell but I'm sure Oculus was able to pick it up for a song.

And speaking of picking things up for a song, it remains quite dubious whether or not Facebook picked up Oculus for the original stated amount of $2B. All of a sudden that number continues to creep higher. In a recent court proceeding CEO Mark Zuckerberg stated that in addition to the $2B original offer for Oculus there was a $700M payment to keep the employees on the books and $300M if Oculus hit certain milestones. The original reason Mr. Zuckerberg was in court was because of an allegation that Oculus stole its VR technology from ZeniMax Media. The result of that courtroom visit was that Oculus was penalized $500M for breaching trade secrets from ZeniMax but the company plans on appealing the decision. If the $500M holds, investors can add $300M of that to the bill as executives will pay $200M.

In addition to the damning fine levied on Oculus, parent company Facebook has decided to close 40% of the Oculus Rift demo stations at Best Buy (NYSE:BBY) stores. This comes as no surprise to me as I was reading an article here on SA on the company a couple of months ago and remember reading a comment that a customer walked into Best Buy and didn't see any customers standing anywhere the Oculus station. Facebook is suggesting that it will focus primarily on the larger markets for this product for demo purposes but that the locations with shuttered demo stations will continue to sell the product.

One has to wonder if the $2B, $3B or $3.5B number that Facebook paid for Oculus was worth it altogether considering the purchase was made almost three years ago. With the potential for the price tag to continue to escalate it is difficult to evaluate that thought at the present time. But the company has a 10-year plan for virtual reality and we're still in the early innings of the company investing in virtual reality content. 2017 will continue to be a big investment year for Facebook in general and virtual reality certainly figures into the equation at this point. The company will continue to focus investments on games and educational experiences for now.

Every decline in shares of Facebook has been a good opportunity to purchase more shares. The stock is currently trading at 20x next year's earnings estimates with earnings growth projections of 24.9% if that is not inexpensive I don't know what is. For comparison purposes I took a look at the Dow stocks and found that Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG) are trading at 21.3x next year's estimates at projections of 3.3% and 7.6% earnings growth for next year, respectively. For now Oculus doesn't figure to be a big source for revenue or bottom line contribution but by the end of the 10-year plan it potentially can be.

I actually initiated my position in Facebook in late November and have been pretty happy with the purchase thus far. I will only be purchasing shares if they are below $116 because I believe that is where Facebook offers additional value. I've selected $116 because it is the average of the 52-week range.

I swapped out of Priceline (NASDAQ: PCLN) for Facebook during the 2016 fourth quarter portfolio change-out because I ended up turning a profit in the name (32.7%, or 33% annualized) and wanted to lock in those gains. Since the swap, I have made out on some gains as Facebook has outpaced Priceline. For now, here is a chart to compare how Facebook and Priceline have done against each other and the S&P 500 since I swapped the names.

When it is all said and done, it matters what the stock has done in an investor's portfolio. For me Facebook is one of my larger positions and has been doing well as I'm up 10.4% on the name while the position occupies roughly 9.7% of my portfolio. I will make purchases in the stock only if it is below $116.

I own Facebook for the growth portion of my portfolio and I will continue to hold onto the stock for now. My portfolio is up 13.4% since inception while the S&P 500 is up 10.3%. Below is a quick glance at my portfolio and how each position is performing. Thanks for reading and I look forward to your comments.

Company

Ticker

% Change incl. DIV

% of Portfolio

Skyworks Solutions Inc.

(NASDAQ:SWKS)

14.93%

10.62%

Facebook, Inc.

10.41%

9.69%

Electronic Arts Inc.

(NASDAQ:EA)

8.80%

3.72%

The Home Depot, Inc.

(NYSE:HD)

5.90%

4.87%

Diageo plc

(NYSE:DEO)

4.30%

10.56%

Eaton Vance Corp

(NYSE:EV)

4.14%

4.79%

AbbVie Inc.

(NYSE:ABBV)

1.46%

3.81%

Silver Wheaton Corp.

(NYSE:SLW)

0.59%

7.80%

Starbucks Corporation

(NASDAQ:SBUX)

-3.69%

5.48%

General Electric Company

(NYSE:GE)

-4.62%

5.08%

V.F. Corporation

(NYSE:VFC)

-10.18%

8.28%

Gilead Sciences Inc.

(NASDAQ:GILD)

-17.66%

19.35%

Cash

$

5.95%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

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.