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:
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!