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Stock of the Month: Facebook, Inc. (FB)

Written by Donnie Nguyen

January 12, 2020

The Most Dominant Social Media Company in the World

Ten years ago, I didn’t “get” Facebook (NASDAQ: FB). It was just another social network like the two others I had belonged to before it – does anyone remember Friendster or MySpace? Since then, Facebook has become one of the most dominant forces in digital advertising, second only to Google, owned by Alphabet Inc. (NASDAQ: GOOGL). According to eMarketer, Google had a 38.2% market share, while Facebook had 21.8%.

In its most recent quarter, Facebook’s quarterly revenues jumped from $13.7 billion to $17.6 billion – a 28% increase. Alphabet’s revenues fell by 17%.

Invest in What You Know and Like

If you’ve been following my articles for a while, you know that my #1 rule is to Invest in What You Know and Like. As a small business owner, I’ve been using Facebook’s advertising platform for about a year. It’s extremely powerful. Facebook has even offered me a free 1-on-1 phone call meeting with a Facebook Marketing Expert to, as they put it, “make personalized recommendations for improving my Facebook ads”. Well, of course, it’s not “free”, I’m spending more money on their platform because of it. And so are the other thousands (or millions?) of advertisers that accept this “free” meeting.

Advertisements

As someone who’s also used Google’s ad platform, I think that Facebook’s ad features, targeting, and cost-effectiveness, are way more powerful than Google’s. It seems like only a matter of time before Facebook’s ad revenues surpass that of Alphabet’s.

Competition

Facebook is the dominant social networking company. It’s already beaten out former players such as MySpace and Friendster and even Google+. Did anyone ever really use Google+?

The closest competitor is probably our July 2019 Stock of the Month pick SNAP, Inc. (NYSE: SNAP). I don’t consider Twitter (NYSE: TWTR) a true competitor as Twitter’s platform has a different demographic and purpose. LinkedIn, owned by Microsoft (NASDAQ: MSFT) focuses on professional networks rather than social, so I also don’t consider it a true competitor.

As long as there are no major setbacks, I expect Facebook to continue its dominance.

Leadership

The faces of Facebook leadership are Mark Zuckerberg and Sheryl Sandberg. These two are extremely competent leaders and still have many years ahead of them. In the long-run, Zuckerberg’s name will probably be spoken of with the likes of Bill Gates and Steve Jobs.

Risks

Investing in Facebook, as with any company, is not without risk. Facebook has been under the scrutiny of the United States government for Russian meddling in the 2016 U.S. presidential race, user privacy, and data security.

Presidential candidate, Elizabeth Warren, wants to break up big tech. What would that mean for Facebook? They’d probably be forced to sell their prized possession, Instagram. I’m not going to sugarcoat it. This is a huge risk, but one that I think is worth taking given the potential upside for the company if they’re able to overcome this obstacle.

Facebook’s problems with the U.S. government remind me of Microsoft’s problems in the 1990s and early 2000s. According to Wikipedia, there were two settlements with the U.S. Government that Microsoft agreed to.

July 1994 – “resulting in a settlement on July 15, 1994 in which Microsoft consented not to tie other Microsoft products to the sale of Windows but remained free to integrate additional features into the operating system.”

November 2002 – “On August 5, 2002, Microsoft announced that it would make some concessions towards the proposed final settlement ahead of the judge’s verdict. On November 1, 2002, Judge Kollar-Kotelly released a judgment accepting most of the proposed DOJ settlement.

After the 1994 settlement, MSFT stock did amazing. It was an 18-bagger in just over 5 years. Here’s the stock chart from July 1994 to December 1999.

After the 2002 settlement, MSFT stock was anemic. It took nearly 11 years for the stock to close at a sustainable high. Of course, this was an era that included the aftermath of the dot-com bubble and the financial crisis. However, from 1994 to 1997, MSFT revenues grew 244.31%, while from 2002-2005, revenues only grew 40.27%. (Source: 10-K). This decrease in growth may have been related to the 2002 judgment. Here’s the stock chart from November 2002 to April 2013.

Will Facebook’s current run-ins with the U.S. government be more like Microsoft’s story after 1994 or 2002. It’s hard to say. And investing in Facebook certainly comes with this risk.

Stats (As of 1/10/2020)

  • Market Cap: $628.2B
  • Closing Price: $218.06
  • Trailing P/E: 34.86
  • Forward P/E: 23.86
  • Price/Sales (ttm): 9.44
  • Profit Margin: 27.08%
  • Return on Equity (ttm): 20.67%
  • Revenue (ttm): $66.5B
  • Quarterly Revenue Growth (yoy): 28.60%
  • Total Cash (mrq): $52.27B
  • Total Debt (mrq): $9.13B
  • Diluted EPS (ttm): $6.26
  • Quarterly Earnings Growth (yoy): 18.60%
  • Total Debt/Equity (mrq): 32.36%
  • Levered Free Cash Flow (ttm): $14.29B

Should I Buy?

Facebook, Inc. could be a good addition to a portfolio that needs exposure to:

  • The Communication Services Sector
  • Social Media Companies
  • Large-Cap Growth Stocks

Be sure to do your own research and determine for yourself if Facebook, Inc. is a good stock for your portfolio.

HOW MUCH SHOULD I BUY?

Here are some portfolio guidelines we Wolves try to live by:

  • Thou shalt not hold more than 35% in any one particular sector
  • Thou shalt not invest more than 10% of principal into 1 individual stock
  • Thou shalt make small purchases. The general rule of thumb is to spend no more than 2% of your portfolio on a single purchase and build up your position over time.

The Bottom Line

Facebook is the dominant social media network with excellent sales growth and market share in digital advertising. Its primary risk is regulation by the U.S. government.

So what do you think about Facebook, Inc.? Share this story on social media and leave a comment in the comment box.

DISCLOSURE

I/we own shares of stock in FB, GOOGL, SNAP.

Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies discussed in this article.

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Donnie Nguyen

Donnie Nguyen

Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.

Connect with Donnie on Facebook and Twitter!

Smarter Investing: M1Finance.com

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