Facebook: Too Much Fear, Strong Sell-Off, What To Do With My Shares (NASDAQ:META)

Summary

Historic market sell-off, why investors should act on this opportunity.
Why Facebook is one of the best investments in tech right now.
In time, investors will look back to today's price as being extremely cheaply priced.
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Investment Thesis

Facebook (FB) is one of the best investments in tech at this price point.

More bad news related to coronavirus may continue to unfold in the coming weeks, but this fear is already priced in. Facebook is a strong free cash flow generating company that makes for a very compelling investment. Here's why I'm bullish:

Want to Strong Returns? Then, Change Your Thinking

Investors would be better served by changing their thinking as markets are met by this historic sell-off.

Rather than looking at Facebook's shares being 10% compared with 2 weeks ago, investors would be better armed by reframing the question: what is the likely impact of coronavirus on Facebook 's long-term prospects?

Furthermore, rather looking at the share price and thinking that they are still holding a gain or a loss, investors would be better rewarded by thinking about how Facebook is likely to perform two years out?

Will Facebook still engage about 2 billion monthly active users? Will Facebook still be a highly free cash flow generative company? Will Facebook continue to gain traction in diversifying its revenue stream? All three questions are answered with a resounding yes. But isn't there more bad news coming?

Further Bad News Expected?

Probably! There is always more bad news in the wings.

In reality, high-quality businesses don't go on sale when their outlooks are great. Businesses go on sale when there is bad news in the air, combined with plenty of uncertainty.

In fact, I contend that the distinguishing characteristic between the average investor and the great investors is experience. Novice investors wait for the perfect theoretical entry point to act. Professionals know that an ounce of practice is worth a ton of theory, that the perfect entry point will never come - however, buying the 'fear' works very well.

Furthermore, rather than trying to time the market, investors buying solid free cash flow generating companies, such as Facebook, and holding these assets for two to three years make tremendous returns.

In other words, not market timing, but time in the market is what drives investors' returns.

Won't Facebook be Less Profitable in the Future?

It is highly likely that Facebook will be less profitable in the future.

Having said that, the point I want to drive home is, while Facebook continues to adapt its business model to accommodate the Federal Trade Commission ('FTC') concerns, it continues to leverage its huge and engaged audience to offer more holistic products.

Near-term opportunities include Instagram's checkout and WhatsApp Pay, but Facebook has made it clear that Facebook is under no time pressure to roll its eCommerce ventures in a half-baked manner.

What's more, unlike its peers, such as Snap (SNAP) or Pinterest (PINS) that need to keep up the illusion of profitable growth, Facebook is already converting every dollar of revenue into north of 20 cents of clean free cash flow (including stock-based compensation) and still posting strong growth.

Valuation - Huge Margin of Safety

Source: author's calculations

As the table shows, on a P/Cash Flow from operations (before capex) basis, Facebook is unquestionably the cheapest amongst its peer group.

For instance, although Twitter (TWTR) is very reasonably priced, its volatile operational performance these past twelve months continues to find its way into its financials. Nonetheless, although Twitter is cheaply priced, it is still being priced significantly higher than Facebook.

Whereas Snap and Pinterest have strong revenue growth, they are both facing decelerating growth rates. Specifically, Snap is guiding for Q1 2020 to grow at 45% revenue growth rates, whereas Pinterest is fairing substantially worse and guiding for just 33% for the year.

What's more, both these enterprises are struggling to turn a clean GAAP profit, yet they remain shockingly overpriced.

Furthermore, as I noted previously, Facebook has launched a new $10 billion share repurchase plan that has been added to its outstanding $4.9 billion repurchase plan.

Put another way, Facebook is returning to shareholders approximately 3%, yet it still continues to grow conservatively at 20%.

The Bottom Line

Investors find themselves firmly on the sidelines waiting for clear visibility before acting. Knowing and not acting is the same as not knowing.

Investors may not get Facebook at the cheapest possible entry point, indeed its shares may sell off further, but today's valuation is highly compelling and worthwhile considering as part of a well-diversified portfolio.

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This article was written by

Michael Wiggins De Oliveira

44.32K Followers

Michael Wiggins De Oliveira is an energy specialist whose primary focus is capitalizing on “the Great Energy Transition” - the confluence of decarbonization, digitalization with AI, and deglobalization - to achieve greater investment returns. Through his 9+ years analyzing countless companies, Michael has accumulated outstanding professional experience in the energy sector and a following of over 40K on Seeking Alpha.

Michael is the leader of the investing group Deep Value Returns. Features of the group include: Insights through his concentrated portfolio of value stocks, timely updates on stock picks, a weekly webinar for live advice, and "hand-holding" as-needed for new and experienced investors alike. Deep Value Returns also has an active, vibrant, and kind community easily accessible via chat. Learn more.

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.

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