Bought Facebook

Facebook tumbled over 20% recently. I took the opportunity to start a position. I bought 100 shares @$175.

I also wrote puts to potentially triple that allocation, and lower my cost basis to the mid $160s. At these levels, I think it is virtually a no-brainer.

The qualitative bull case is straightforward:

  • dominant, wide moat “inevitable” company
  • Instagram and WhatsApp undermonetized
  • margin compression is a preemptive, self-induced act of aggression. It will increase moat in the long term
  • any forthcoming regulation will probably entrench incumbents like FB and GOOG

FB has historically sported 40%+ EBIT margins. They are now coming down to 35% levels – still higher than Google’s. Its topline growth rate will also temper from a scorching 40-50% to more reasonable levels as expected!

Its EPS, which is a reasonable conservative proxy for FCF, over the past few years has been as follows:

2015: $1.30

2016: $3.50

2017: $5.40

TTM: $6.50

Still, it is an insanely profitable company with a respectable growth runway.

The quantitative bull case is also compelling.

FB has over $42B in cash on its books. Dividing this by the number of outstanding shares (~3B), it has about $14/share in cash.

In FY 2018, EPS is expected to be around $8.50 or more. At today’s price of $170, it trades at a PE of 20. If you back out the cash, the P/E drops to 18x.

For an insanely profitable, wide moat company, that is still growing like gangbusters, this seems cheap!

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