Facebook Stock Analysis: Is it a Strong Buy Amongst Whistleblowers and Privacy Concerns?

Since the end of September Facebook Inc. has faced a new wave of reputational issues initiated by an ex-employee, called “the whistleblower” by the media, who leaked internal documents to the Wall Street Journal revealing the company’s misconduct towards its 2.8 billion users. Apparently, when it came to choosing between profit and users’ safety Zuckerberg’s company has always prioritized growth and personal interest. However, this is history already experienced and if Cambridge Analytica’s scandal hasn’t stopped this massive tank that is Menlo Park’s company nothing else will.

Controversies

In regard to MSCI’s rating system, Facebook was downgraded in November 2020, positioning itself as a laggard among 27 companies in the interactive media & services industry with a B score, out of a AAA to CCC scale.

It is well known that the company’s most critical aspect is its behavior in terms of business ethics. Namely, besides the multiple accusations it emerged that Facebook-owned Instagram had kept secret its internal research into the effect social media had on teenager users. This led to governments’ awareness as to its negative social impact and this could result in stricter new regulations. Moreover, it is now evident that Facebook connived at the drug cartels’ and human traffickers’ use of the social platform in developing countries.

Facebook’s intrinsic value

Ethical controversies notwithstanding, Facebook Inc. seems to have a high rewarding potential over the forthcoming years. The employment of a Discounted Cash Flow calculation can support this assertion.

Firstly, by calculating the simple Free Cash Flow to Equity (CFO-CAPEX) of each year starting from 2010 and then relating them to the associated net income we obtain highly diverse FCF rates, ranging from 1178% in 2012 to 69% in 2018. The same goes for the revenue growth rates and the net income margins. However, for each of them we look at the average percentage of the period 2017-2020, obtaining therefore:

  • A FCF rate of 94%;
  • A growth rate of 33%;
  • A net income margin of 35%.

Moreover, we consider the analysts’ revenue estimates of 119.46B in 2021 and 142.93B in 2022.

In terms of Weighted Average Cost of Capital, we can only consider the Capital Asset Pricing Model times the market capitalization ratio out of the sum between market cap and total debt since the company’s interest expense in 2020 was 0. Therefore, given the data below we obtain a WACC of 10.16%.

  • Beta: 1.04
  • TNX: 1.519%
  • Mean of 1998-2021 S&P 500: 9.965%
  • Market cap quota: 0.986

To determine the Terminal Value beyond a five-year period we assume a perpetual growth of 2.5%.

Eventually, we divide today’s value of 1149024.78M by:

  • 2405448410 shares of Class A common stock outstanding;
  • 2847669951 shares of Class A and B common stock outstanding.

In the former case, we get a fair value equity of 477.68$, while when considering all shares out the intrinsic value is of 403.50$. Either way, Facebook Inc. looks like a strong buy.

Subsequently, we can evaluate Facebook’s Inc. financial metrics compared to its competitors’. Since Menlo Park’s corporate’s earnings come mainly from advertising, its main competitor in this field is the giant Alphabet Inc..

To determine the liquidity degree we employ current ratios. So we get a 5.43 for Facebook and a 3.15 for Google.

Then, in terms of solvency capability and stability we pinpoint 4% as Facebook’s total D/E and 6.08% as Google’s.

As for profitability we spot the following ratios:

  • FB: 30.09% ROE and 37.18% profit margin;
  • GOOGL: 27.87% ROE and 28.57% profit margin.

Once again, Facebook stands out due to its fundamentals and its generally better performance as compared with its main competitor.

Risks

Nonetheless, these results are not bereft of threats. First and foremost, with the Apple’s privacy update users are being asked for consent on personalized ads and since it seems that a significant proportion has denied permission the latest policy may dramatically cut Facebook’s revenues. In addition to this, government action in the company’s activity could lead to a slowdown in growth. Lastly, the October 4th outage turned into a gain for other social media and the users’ openness to more options. For that reason, if Facebook Inc. made further false moves users could make the switch to other apps.

Conclusion

Facebook is expecting a significant deceleration over the forthcoming quarters due to the recent iOS updates and the latest reputational issue has only worsened the already low prospects. In a time of increasing uncertainty numerous investors chose to pull out, but fundamentals say otherwise. However, favorable metrics don’t justify the company’s misconduct towards users. In doing this it is indeed pushing people to seek safer alternatives.

Sources

ESG Ratings Corporate Search Tool – MSCI

Facebook Files: 5 things leaked documents reveal – BBC News

Facebook – Home (fb.com)

Facebook under fire over secret teen research – BBC News

Facebook Employees Flag Drug Cartels and Human Traffickers. The Company’s Response Is Weak, Documents Show. – WSJ

Apple Privacy Change May Cost Facebook, Google $25 Billion Over Next 12 Months (forbes.com)

Leave a Reply

%d bloggers like this: