9 Reasons To Buy Facebook Now

Summary

• Facebook's stock has appreciated significantly so far during 2017, but I still see considerable upside based on a low PEG ratio of 1.22.
• Facebook recently announced their 2 billionth user, but there's still considerable room for growth internationally.
• Facebook trades at a discount to peers and also shows upside potential based on a two-stage discounted cash flow model.
• Wall Street expects 13% upside potential in Facebook's stock.

Facebook's (FB) stock has risen nearly 36% so far year-to-date, but I still see significant upside potential. In particular, a PEG ratio of 1.22 is attractive and less than other large-cap technology peers. Based on the following 9 reasons, I'm confident Facebook can continue growing and monetizing their user base, which make it a stock to buy right now.

1. Impressive Growth Speaks For Itself

Facebook is at a stage where they are still growing sales quickly (54% growth last year), but they have also begun to turn those sales into strong profits and free cash flow.

Data in the tables above and the one below are from Google Finance.

2. Facebook is Building a War Chest

For now, Facebook isn't providing a dividend or repurchasing shares, which means all of their free cash flow is being stockpiled on their balance sheet. Facebook also doesn't have any debt, which will allow them maximum flexibility. They should be able to buy competitive threats like they have done with Instagram and WhatsApp.

3. Facebook is Quickly Adding Users

Perhaps Facebook's most impressive feat is their growth in monthly active users. For example, in 2016, they added 269 million additional monthly active users, which marked 17% growth over the previous year. This was actually more than the rate over the last 3 years, which is impressive.

Data Source: Facebook's annual reports

4. There's Still Plenty of Room For Growth

Even though Facebook recently announced they have eclipsed 2 billion active users, there's still plenty of room for growth. With a worldwide population of 7.5 billion, this gives Facebook a reach of approximately 27% of the world's population. Breaking this down a little further, Facebook has penetrated approximately 65% of the United States and Canada, 47% of Europe, and 20% of the rest of the world. According to Facebook's 2016 annual report, India, Indonesia, and Brazil were key areas of growth for the year.

5. Brand Power

According to Forbes, Facebook has the 4th most valuable brand in the world. This is what keeps users coming back again and again and has also allowed Facebook to become one of the biggest advertisers in the world.

6. Facebook Has A Very Attractive PEG Ratio

Relative to large-cap technology peers, Facebook has the lowest PEG ratio, which is a good indication that the stock trades cheap. As a comparison, Amazon has a similar growth profile, but has a PEG ratio of 5.34. I purposely didn't include Amazon (AMZN) in this analysis because their valuation metrics are significant outliers.

• Trailing P/E, Forward P/E, and PEG Ratio provided by Yahoo Finance.
• LT Growth Rate provided by Reuters.

7. Discounted Cash Flow Analysis Shows 17% Upside Potential

It's no surprise that a discounted cash flow model shows 17% upside in Facebook's stock since they are starting to produce large amounts of free cash flow. I also consider this analysis conservative given I used a beta of 1, a low long-term growth rate, and Facebook's fully-diluted shares.

Risk Free Rate - I used the yield on a 30-year Treasury bond.

Equity Risk Premium - This figure is calculated every month by Aswath Damodaran, a Stern Business School Professor.

Beta - This model is quite sensitive to beta, and statistics from different sources use different measurement time periods and thus vary widely. For example, Google Finance lists Facebook's beta at 0.66, but my E-Trade dashboard lists it at 1.0. Because of this, I took the most conservative approach and used a beta of 1.0.

Required Rate of Return - Calculated by multiplying the Equity Risk Premium by Beta and then adding the Risk Free Rate.

This model is presented in two stages. During the first 5 years (first stage), Facebook's FCFE is assumed to grow by $4 billion per year. Then, Facebook is assumed to grow at an average rate of 3% in perpetuity (second stage).

8. Wall Street Is Bullish

According to MarketWatch, 36 out of 43 analysts recommend Facebook as a 'buy' (0 recommends as a 'sell'). The average target price is $171.11 per share. Given the current stock price of $150.98, that's 13% upside.

9. The Unknown Potential

With a massive amount of cash that continues to get bigger every year, Facebook has nearly unlimited potential. Here are just a few examples of the possibilities:

• Entertainment - Facebook is already the leader in personal content creation, but they could easily start producing entertainment like Amazon or Netflix (NFLX).
• eCommerce - with a user-base of 2 billion people and more personal behavioral data than any other company in the world, Facebook could easily start their own eCommerce platform or partner with another company.
• Large & Small Acquisitions - Facebook will likely continue making small acquisitions and could make large ones as well. I expect them to continue scooping up any competitive threats and expanding their social reach like they did with Instagram and WhatsApp.

Conclusion

Facebook has impressively grown revenue, profits, and free cash flow over the last couple of years. I'd expect these trends to continue based on its growing user base and the company's track record of monetizing its user base more effectively every year. Even though Facebook's user base is immense, there is still considerable room for growth internationally.

Facebook has $32.3 billion in cash and no debt. This allows tremendous amount of flexibility. Not only will they continue committing capital to further developing mobile technologies and geographic expansion, but they can also continue acquiring companies and patents. Facebook has the ability to acquire any developing social media property, which gives the company an almost unfair level of market control.

Best of all, Facebook has an attractive fundamental valuation based on multiple approaches. Its PEG ratio of 1.22 is lower than that of any other large-cap technology company. I also calculated 17% upside based on a two-stage discounted cash flow model. I also believe Facebook could develop additional streams of revenue outside of advertising, which I consider as purely upside. For these reasons, I recommend buying the stock now.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.