Facebook does not require further introduction as it is one of the most powerful social media platform in our times. Actually, I was using another social media platform - Friendster during my university days. That was the Tinder back then.
Facebook is a social media platform, it monetize through digital advertisement through its huge database of Facebook users. Gaming revenue is decreasing. Facebook takes 30% of purchases, with balance going to likes of Zynga. Facebook also acquired Whatsapp and Instagram.
Strengths:
Leading social platform
2 billion of active facebook users - network effect
Weakness:
Dependent on cyclical ad market - 98% of quarterly revenue came from advertising
Lack of alternative source of diversified income
Threat:
Facebook members growth decline or stagnate
The new/younger generation may not wish to use Facebook, they prefer SNAP or other platforms.
Reputation damage (loss of trust) which may lead to downfall of Facebook
Users will grow numb to ads
New Social Platforms may enter the social media industry but the eroding effect will be very slow
Opportunities:
With big data, can harness them into other business ventures other than ads
New products such as Oculus virtual reality headset and workplace office software
With big amount of cash can make new acquisition or build stronger moats to retain users
Financials
The revenue has been growing since 2013. I just heard from my friend who is running an eCommerce store using Facebook advertisement during last year November and December, the ads cost more for a campaign. I believe this is due to the holiday season. In January, the ads cost is back to normal. There is a lot of algorithm Facebook is using based on seasons, demand and supply, target audience group, etc. You get to sell to an audience group with specific interest, hobbies, family background, profession and income level. This is targeted marketing. This makes Facebook's advertisement a very powerful tool for internet marketer. I have run Facebook ads, mobile advertisement and Google campaigns. My personal experience for eCommerce and apps download, Facebook is by far the most superior marketing behemoth.
EPS is increasing since 2013. You can calculate CAGR. However, I do not think this type of growth rate is sustainable.
The interest expense is decreasing over the years. Free Cash Flow is increasing over the years, building up a strong hoard of cash.
Valuations
My calculation on EV/EBITA is at 20.33 and I took a very conservative approach to discount the growth rate, placing an estimation on the targeted price between USD 190 - 200 in 2021.
Conclusion
When I am writing this, FB share price is USD 176. There is not enough margin of safety for me to buy this company. I will need a good 30% margin of safety before I will buy FB. Personal take. DYODD. This is not a buy or sell call.
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