Facebook Has Probably Gone Most Of Its Way Down

Mar. 11, 2020 1:44 PM ETMeta Platforms, Inc. (META)55 Comments

14.93K Followers

Summary

From technical point of view, Facebook is critically undervalued at the moment.
The company is balanced in terms of its internal growth.
FB is clearly undervalued relative to the main blue chips in Nasdaq.

Facebook (FB) shares fell 30% from their all-time high, and this is a good moment to review the company's fundamental state.

1. Technical parameters

I’d like to start with the analysis of the long-term trend of Facebook stock price.

The entire history of Facebook’s stock price growth is well-described by the exponential trend which appears as a straight line on the graph with a logarithmic y-axis:

At the moment, the actual price of Facebook’s stock deviates from this trend by nearly 40% or by three standard deviations:

This is almost the maximum deviation since 2014:

The rolling annual total price return of Facebook's stock has dropped to the lower border of the standard deviation:

The rolling monthly total price return is much lower than its standard deviation:

All this, from technical point of view, indicates that Facebook is critically undervalued at the moment.

2. Growth drivers

The long-term relationship between the revenue TTM absolute size and Facebook's capitalization describes the company's current capitalization as clearly undervalued:

To a lesser extent, but the same is true for the long-term relationship between the EPS TTM absolute size and the company's capitalization:

Now, let's look at how the growth of Facebook's financial indicators relate to the current level of its multiples.

Speaking of the revenue, it should be noted that the current level of Facebook's capitalization, reflected by the P/S multiple, is balanced with the current pace of the revenue growth:

We reveal the same condition analyzing the interdependence between the growth rate of Facebook's EBITDA and the value of the EV/EBITDA over the past four years:

So, from the point of view of the established patterns, Facebook is undervalued in terms of the absolute values of the key financial indicators and balanced in terms of their growth rates. In other words, so far there is no clear undervaluation in this context.

3. Comparable valuation

At this section I would like to offer a comparable valuation of Facebook through historical-priced and forward-priced multiples. There are several models that deserve your attention.

First of all, let's consider the P/S (forward) multiple. In this case, the implied price is greater than the actual:

The most interesting thing is that over the last year, until recently, the implied price had been corresponding to the actual price. The situation has changed only since February:

Judging by the P/E (forward) multiple, Facebook is undervalued by about 40%:

As in the previous case, such a clear underestimation appeared only relatively recently:

Now let's look at more familiar, historical-priced multiples. This is what we get analyzing the EV/EBITDA multiple:

And here is what we get analyzing the EV/FCF multiple:

Both multiples indicate that Facebook is undervalued. And both multiples serve as good markers of the fundamental state of Facebook's stock price.

And, eventually, let's evaluate Facebook through such a fundamental multiple as P/BV:

Based on this multiple Apple is undervalued by 21%.

So, we have to admit that now Facebook is clearly undervalued relative to the main blue chips in Nasdaq.

Bottom Line

In my opinion, looking at the market in general, it is still difficult to say what is happening: a healthy correction or the beginning of a bear market. But, even if it’s a bear market, and we still have a long way to go down, the advantage of Facebook is that it is at least not overvalued like Apple or Microsoft. And relative to the main blue chips in Nasdaq, Facebook is even clearly undervalued.

It is also important to note that the COVID-19 epidemic makes people stay longer at home, and for Facebook it's a huge plus. Here is an interesting study on this topic.

In the current situation, it is difficult to be positive, but I still think that Facebook has already gone most of its way down.

This article was written by

Oleh Kombaiev

14.93K Followers

Individual investor, data and financial analyst. I am interested in investment decisions based on objective methods of modeling and statistical analysis. Besides, I pay much attention to the psychological aspects of decision making.

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