Facebook (FB, U$139.92)

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General Comments

Founded in 2004 and listed on the stock market only since 2010, Facebook's market capitalization currently stands at more than $400 billion, making it one of the 10 largest companies in the United States.

Facebook has more users and more time of use than any of its competitors, making it by far the number one social network (users spend an average of 50 minutes on various Facebook applications, compared to 40 minutes in 2014).

The company owns Facebook, WhatsApp, Messenger and Instagram, as well as the Oculus product line.

While this number of visitors is impressive and the multiplication of visits is the way to monetize the site, Facebook's true wealth is actually based on the sheer amount of information it holds about its users, their preferences, their tastes, etc.

This information is not sold by Facebook which, on the contrary, protects this data preciously, which it monetizes by selling well-targeted advertisements.

This situation is quite timely as many companies are shifting an increasing portion of their advertising budget to new media.

Facebook continues to invest not only in areas of the future such as virtual reality, augmented reality and everything related to artificial intelligence, but also in the daily development of new tools and functions that keep users in their ecosystem.

On the other hand, although the company's penetration into the global market is already strong, development, improvement, increased service offerings and access to the Internet in certain parts of the world will also benefit Facebook in the medium and long term.

In a changing world in which television, the Internet and virtual reality are converging more and more, Facebook is particularly well positioned to be at the forefront of this revolution!

Other Disnat GPS reports available in the GPS section of the Disnat website: Apple, Disney, Nike, Cisco, Microsoft and AT&T.

Financial Health

Facebook's financial health is one of the strongest around.

The company has no debt and as of December 31, 2016, it holds more than $8 billion in cash and $20 billion in short-term liquid assets.

In addition, last year the company generated free cash flow of more than $11 billion.

These figures are impressive, but above all we believe that Facebook's dominance in its field should eventually make cash flows stable and recurring.

Like utilities (electricity, gas, etc.) or telecommunication companies, Facebook is on the way to becoming a business that derives revenues from captive clients. Obviously, it is less necessary to everyday life than electricity or a telephone, but judging by the behavior of some users...

One can say that Facebook is in particularly enviable financial health which will allow it to continue being a fierce competitor and to be successful in a rapidly changing world.

Growth

Facebook's revenue and earnings growth over the past five years has been extremely strong.

The accelerating growth is also impressive when comparing earnings between five and three years, and between three years and one year.

Obviously we can not expect such growth to continue indefinitely. When there are already 1.86 billion users, the ability to add many new ones decreases sharply.

That being said, these days the increase in the number of users is probably much less important than the company's ability to monetize their presence as effectively as possible.

In addition, Facebook can also continue to increase the time users stay within its environment, whether through existing products or by using a new range of virtual reality and augmented reality products.

Facebook's dominance in social networking will probably translate into weaker growth in the future but should, however, become increasingly stable and steady for a longer!

Valuation

We have no five-year average for Facebook's price/earnings ratio.

Nevertheless, we can see that its price/earnings and future price/earnings ratios are relatively high.

One factor that explains this situation is the company's robust growth, which allows investors to pay a higher price in terms of price/earnings.

Moreover, the company has no debt and is well positioned in terms of cash.

Given Facebook's anticipated higher growth compared to the S&P 500 and its particularly solid financial strength compared to the index, with a future price/earnings ratio of 26.9 times for Facebook and 19.6 for the market, we believe that this gap is actually smaller than it seems.

At Disnat GPS, we believe the market is pricing Facebook slightly below its fair value. We are therefore very pleased to hold a superior company at a fair price!

Governance

Facebook is a growing business.

From this perspective, measures such as a steady increase in the dividend or the buyback of shares are not valuable criteria.

As Facebook aims to continue to grow rapidly, it is normal for the company to retain and reinvest profits in research and development, or use them to make certain acquisitions.

With regard to research and development, it is always risky to try to foresee the future, but Facebook seems to focus on fields (augmented and virtual reality) that fit well with its current activities.

Historically, Facebook's acquisitions were well-targeted and well-integrated, and we believe that this will continue.

The strong and widespread use of Facebook puts it in an extremely strong position to develop new products, and above all, to market them to an existing client base!