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Facebook Is a Highly Compelling and Cheap Stock

Facebook has strong free cash flows, is growing rapidly and is cheaply valued. Don't miss out.

Facebook  (FB) - Get Meta Platforms Inc. Class A Report delivered mixed Q4 results, as investors expected positive news but found themselves disappointed with Facebook’s results.

The social media juggernaut saw its shares sell off more than 5% on the back of its reported figures before dropping another 4% on the next trading day, thus giving back all its outperformance from the S&P500 these past twelve months.

Looking ahead, there are ample reasons for investors to be staunchly bullish on this name. Despite Facebook’s drop in profitability, this still leaves Facebook as one of the most cash-generative companies available. 

Furthermore, Facebook is still expected to grow at approximately 20%. For now, its shares remain irrationally cheap and are a compelling buying opportunity. Here’s why:

Still Growing Fast

For some time, Facebook has noted that it will not grow as fast as it had in the past, given that its ability to gather user data is being hampered, hindering advertisers' ability to target users as effectively. Accordingly, headwinds continue to face the company and its operations are struggling to adapt, which continues to cause investors anxiety.

But in a highly bullish sign, Facebook’s average revenue per user (ARPUs) is up in every geography (including U.S. & Canada), not to mention that its broader Family Average Revenue per Person (ARPP) across Facebook's family of apps shows no signs of slowing down and should remind investors of Facebook's underlying diversification.

Thus, although Facebook has guided Q1 2020 to grow its revenue by 21%, which may not seem as enticing compared with its historical averages, we should be mindful that we are not being asked to pay a premium for its stock either, as we were historically.

Furthermore, in a signal to investors that management considers its stock undervalued, Facebook raised its authorized buyback to $24 billion -- amounting to just over 4% of its market cap.

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Strong Potential: Payment Network

Investors are not giving significant consideration to Facebook’s ambition to diversify away from advertising. For now, Facebook still derives approximately 95% of its revenues from advertising. But Facebook is steadfast on growing and developing its payment applications.

For instance, during the recent call, WhatsApp Payments was highlighted. CEO Mark Zuckerberg noted a very successful pilot test where WhatsApp Payments using India’s Unified Payments Interface (UPI) system was rolled out -- allowing users to send money easily and quickly. As a result, Facebook will be extending WhatsApp Payments' reach to other countries over the next six months.

Indeed, given that Facebook’s family of apps have approximately 2.3 billion daily active users (DAUs), there is no question surrounding the appeal of these platforms.

Valuation - Large Margin of Safety

Unlike many social media companies, Facebook’s operations are incredibly free cash flow generative. Indeed, Facebook's most recent Q4 2019 figures point to its free cash flow reaching $4.8 billion, thus ending 2019 at approximately $20.5 billion. This implies Facebook’s stock is being traded for 28x free cash flow.

On the surface, this figure does not scream out as a bargain opportunity. However, we should remember that these are not "massaged" earnings, but "clean" free cash flow. 

Also, lest we forget, Facebook’s balance sheet stands head and shoulders above its sea of competitors, as its balance sheet carries no debt. What's more, Facebook carries close to $55 billion of cash and equivalents.

The Bottom Line

Facebook is expected to grow at slightly more than 20%, while it remains a free cash flow machine, with a rock-solid balance sheet and a large authorized share repurchase program. Yet it is being valued at a relatively modest 28x free cash flow. This opportunity is too compelling to remain ignored for too long. 

Facebook is a holding in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells FB? Learn more now.