Here’s Why Facebook Inc (FB) Remains Overvalued

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Here’s Why Facebook Inc (FB) Remains Overvalued

One of the stocks that is not included in our deep value Stock Screeners is Facebook Inc (NASDAQ:FB).

Facebook Inc (FB) is the world’s largest online social network. Its products are Facebook, Instagram, Messenger, WhatsApp, and Oculus. Its products enable people to connect and share through mobile devices and personal computers.

A quick look at Facebook’s share price history over the past twelve months shows that the price is up 36%, but here’s why the company remains overvalued.

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The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that Facebook Inc (FB) has $35.452 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $0 Billion in total debt. Therefore, Facebook has a net cash position of $35.452 Billion (cash minus debt).

If we consider that Facebook Inc (FB) currently has a market cap of $489.967 Billion, when we subtract the net cash totaling $35.452 Billion that equates to an Enterprise Value of $454.515 Billion.

If we move over to the company’s latest income statements we can see that Facebook Inc (FB) has $15.401 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 30, or 30 times operating earnings. With the average acquirer’s multiple in our Large Cap 1000 Stock Screener being 7.4 that places Facebook squarely in overvalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Facebook generated trailing twelve month operating cash flow of $19.384 Billion and had $5.079 Billion in Capex. That equates to $14.305 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of just 3%.

The company has done a great job in terms of its annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $62.188 Billion in equity for the quarter ending March 2017 and $66.481 Billion for the quarter ending June 2017. If we divide that number by two we get $64.334 Billion. If we consider that the company has $13.610 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 21%.

There is no question that Facebook is at the top of its game with current revenues of $33.173 Billion (ttm) and net income of $13.155 Billion (ttm) at historical highs, as is the company’s book value per share of $22.89 (ttm). The issue however is the company’s current valuation. Facebook is trading on a P/E of 38, a P/B of 7.4, and a P/S of 15.1. If we invert the P/E of 38 that means that Apple provides an earnings yield of 2.6%. The company has a FCF/EV Yield of 3% (ttm) and an Acquirer’s Multiple of 30, or 30 times operating earnings. All of which indicates that Facebook is overvalued.

About The All Investable Stock Screener (CAGR 25.9%)

Over a full sixteen-and-one-half year period from January 2, 1999 to July 26, 2016., the All Investable stock screener generated a total return of 5,705 percent, or a compound growth rate (CAGR) of 25.9 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.

Article by Johnny Hopkins, The Acquirer’s Multiple

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The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of acquirersmultiple.com. The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at acquirersmultiple.com, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”

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