Thursday, 29 January 2015

Is Facebook cheap?

I have never owned Facebook shares having generally preferred their great technology behemoth peer Google.  You cannot but admire Facebook's progress though over the last few years.  The share price chart - after all - never lies:

So what is my quick and dirty valuation observation on Facebook?  Well leafing through the presentation document I really like the ARPU progression chart: 

Anything which shows continued progress across all geographies is always a tick in the box (even if the differential in ARPU is very US/Canada centred). 

What also struck me was the bump in R&D and marketing spend - well flagged in the post results write-ups - as the Facebook management team continue to build-out their service.  

There is another interesting differential too - and that is GAAP EPS versus non-GAAP EPS.  We all know that this is a common trait in many fast growing (technology) companies with stock compensation and possibly amortisation issues but the differential was particularly marked during the last quarter.  

Now this matters.  On a non-GAAP basis the company generated US$7.1bn worth of operating profit last year at a full year growth clip of a mere 82%.  On a GAAP basis though it was more like US$5bn (which more than doubled).  With a market cap of a shade under US$200bn...this matters.  Halve the growth rate and extrapolate the numbers for another year and on a non-GAAP basis Facebook shares trade on a prospective x20 multiple (the GAAP equivalent is around x26s).  That is still punchy - but then most companies lapping last year's numbers with a gain in excess of 20% equivalent tend to be.  

A prospective P/E of x40...well if you are a believer this is a peg of around x1.  Here is another metric to think about: free cash flow.  

At the thick end of a US$1bn a quarter that's a free cash flow yield of...c. 2%.  

My instinct is that most of these relative metrics will look better in Google's hands... There is a price for Facebook...but it is probably lower than here. I am going to keep watching (and so far not using).  

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