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Facebook: The Best Long Idea for 2016

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  • Facebook’s messaging solutions could have 2 billion users.

  • Facebook owns three of the top four social media solutions in the world.
  • All of Facebook’s social media could have 3.55 billion users.
  • WhatsApp added 100 million users between April and September of 2015.
  • Facebook’s revenue has grown by $11.31 billion in three years.
  • Facebook generated $7.355 billion in cash from operations in third quarter 2015.
An out of character Mark Zuckerberg with his wife Priscilla Chan.
An out of character Mark Zuckerberg with his wife Priscilla Chan.

The one stock I would really like to buy and hold a large position in right now is Facebook (NASDAQ: FB). The social network is a great buy-and-hold play because it is a fast-growing company that actually makes a lot of money as it grows.

The social media sector is filled with companies that do not make money, such as LinkedIn and Twitter. Facebook is growing faster and bigger than those companies, and it is making money. It is also the one publicly traded social media company I know of where the future prospects and the financial numbers justify the share price.

Facebook’s Social Media Could Have 3.55 Billion Users

Facebook’s greatest asset is its social media footprint, which is incredibly vast and growing. The best way to appreciate Facebook’s social media reach is to take a look at Statista’s chart of the top 10 social media solutions in the world. Four of them are Facebook products, including Facebook itself with 1.55 billion users, WhatsApp with 900 million users, Facebook Messenger with 700 million users and Instagram with 400 million users.

The chart also tells us that Facebook owns the two top social media applications in the world, itself and WhatsApp, and three of the four top solutions: Facebook, WhatsApp and Messenger. Mark Zuckerberg has managed to amass what amounts to a blue chip portfolio of social media brands.

f8-2015-apps-mau-100575604-orig

More importantly, Facebook has built what amounts to the largest audience in history. When all of the numbers for Facebook, WhatsApp, Facebook Messenger and Instagram are added up, the result is 3.55 billion users. Obviously, there is a lot of overlap here, but Facebook’s three messaging solutions—WhatsApp, Messenger and Instagram—have two billion users.

The rate at which some of that media is growing is incredible. WhatsApp alone could have gained 100 million new users over the summer of 2015. In April 2015 CNBC reported that WhatsApp claimed to have 800 million users; in early September WhatsApp founder Jan Koum announced that the service had attracted 900 million users.

Facebook Makes Money

Now for the most interesting thing from an investor’s standpoint: Facebook actually makes money.

Facebook reported a net income of $2.82 billion for the third quarter of 2015 on September 30, 2015. On the same day, it also reported the following:

  • A TTM revenue of $15.94 billion
  • A profit margin of $2.82 billion
  • A free cash flow of $1.412 billion
  • Cash and short-term investments of $15.83 billion
  • Generating $7.355 billion in cash from operations
  • A profit margin of 19.91%

In contrast, on the same day, Twitter (NYSE: TWTR) reported a net income of -$556.14 million, and LinkedIn (NYSE: LNKD) reported a net income of -$147.82 million. The numbers show us that Facebook is generating billions in income while its competitors are losing tens of millions in dollars.

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To be fair, there are some deficiencies at Facebook when it is viewed from a value investing standpoint. The earnings per share (EPS) is a little low for my taste at .9879, and there is no dividend, although shareholders were rewarded with an 8.05% return on equity.

Facebook’s Growing Income

What makes up for those weaknesses is the rate at which Facebook’s revenue and income have been growing. A quick look at data provided by our friends at YCharts demonstrates this company’s potential. Some of the highlights of the growth include:

  • Facebook reported $4.63 billion in revenue in September 2012; that grew to $6.872 billion in September 2013, $11.2 billion in September 2014 and $15.94 billion in September 2015. Facebook added $11.31 billion in revenue in just three years. The company’s revenue more than tripled during that period.

 

  • In September 2012 Facebook reported a net income of $291 million. In September 2013 that income had grown to $1.041 billion, in September 2014 it had reached $2.762 billion and by September 2015 it was at $2.82 billion. Facebook’s income today is nearly 10 times larger than it was in 2012.

Facebook-stats

  • Free Cash Flow. In September 2012 Facebook reported a free cash flow figure of $79 million. In September 2013 it reported a free cash flow of $666 million; that number grew to $766 million in September 2014 and in September 2015 it had reached $1.412 billion.

 

  • Cash and Short-Term Investments. Facebook reported having $10.45 billion in the bank in September 2012, a year later in September 2013 it had $9.328 billion in the bank, by September 2014 the company had $14.25 billion in the bank and in September 2015 it had $15.83 billion in cash and short-term investments.

 

  • Cash from Operations. Back in September 2012 Facebook reported $1.441 billion in cash from operations. In September 2013 it reported $3.672 billion in cash from operations, a figure that grew to $5.105 billion in September 2014 and $7.355 billion in September 2015.
It's easy to see why he's smiling.
It’s easy to see why he’s smiling.

These figures demonstrate that Facebook generates a lot of cash, and more importantly, it keeps that cash. The expansion is not eating up the company’s resources. Instead, it is able to make money as it grows and increase the amount it makes.

The cash from operations figure demonstrates that Facebook has a lot of float. Its business model gives it the cash it needs to grow without losing money. Like Alphabet, Facebook has avoided the classic tech pitfall of growing fast without making money.

That also makes it possible for Zuckerberg to make strategic acquisitions, such as the purchase of WhatsApp in February 2014, without taking substantial losses or debts. This ability to make such acquisitions means that Facebook is in a position to take advantage of the large-scale social media consolidation that is coming. It can snap up smaller, fast-growing solutions that are not making money and add them to its footprint.

More importantly, the past few years’ financial numbers indicate that Facebook can maintain this pattern of behavior. That makes it a great long-term play because the potential for substantial profitable growth is there.

The company also has an excellent track record of making acquisitions. Like Warren Buffett, Zuckerberg is willing to get out his checkbook when a good company becomes available.

All this shows that Facebook could become the dominant brand in social media, much as Google has become the dominant brand in search. If that happens, Facebook could reward investors with share prices similar to those at Alphabet at some point.

Therefore Facebook is the best long-term buy for 2016. The risk is low because of its track record of making money, yet the potential for massive growth is there.