Facebook (NASDAQ: FB) is the only value investment in the social-media realm for two very obvious reasons. The social-media solutions Facebook owns have an incredible number of users, and the company makes a lot of money.
The true value at Facebook is the incredible number of users it has accumulated. The core application; Facebook itself had 2.072 billion users at the end of third-quarter 2017, Statista reported. That number was up from 1.788 billion in third-quarter 2016.
Facebook has the Largest Audience in History
Another popular Facebook-owned solution; WhatsApp had 1.3 billion users in July 2017, Statista estimated. Then there is Facebook Messenger, which had 1.2 billion users in April 2017, according to Statista’s calculations. Finally, there’s the Facebook social media property that some of us forget about Instagram, Statista estimated that Instagram had 800 million users in September 2017.
If Statista’s figures are correct, Facebook’s network consists of 5.3 billion social media accounts. Obviously, a lot of those accounts are fake, inactive, overlapping or controlled by bots, but still – it’s vast.
As I have pointed out before, this gives Facebook the largest audience in human history. Mark Zuckerberg is the greatest media czar of all; his company reaches more viewers than any of the historic press barons, media tycoons, or movie moguls. What else could be more valuable in today’s world?
Facebook is making a lot of Money
The other incredible thing about Facebook is that it is actually making a lot of money. Most social-media companies only seem to be able to lose money.
Here are some numbers from ycharts that prove Facebook is making a lot of money:
- A net income of $15.23 billion on September 30, 2017. That was up from $8.209 billion in September 2016, Facebook’s income grew by $7.021 billion in 12 months!!
- A free cash flow of $4.372 billion on 30 September 2017. This number has also seen incredible growth over the past year. In September 2016, Facebook’s Free Cash Flow was $2.941 billion.
- A profit margin of 45.56% for third-quarter 2017, the income figure above indicates that profit margin is for real.
- Cash and short-term investments of $38.29 billion on September 30, 2017. This number grew by $12.15 billion in 12 months; Facebook had $26.14 billion in the bank in September 2016.
- $21.48 billion in cash from operations on September 30, 2017. This number too is growing dramatically; it was $15.73 billion in September 2017.
These numbers indicate that Facebook’s ability to generate cash is almost as incredible as the extent of its’ social network. If these numbers are real, Mark Zuckerberg is one of the greatest business geniuses in human history.
Why Facebook is a Value Investment
Facebook has value elsewhere as well, it reported assets of $79 billion on September 30, 2017, and Mr. Market gave it an enterprise value of $483.48 billion on 9 November 2017. Given the size of the social networks, the enterprise value might be underestimated.
Strangely enough, Mr. Market thinks Facebook is overvalued; it had a market capitalization of $517.58 billion on 9 November 2017. I think Mr. Market is wrong, my estimation that Facebook has a potential value of $1 trillion or more.
Owners of Facebook stock will certainly agree, they enjoyed a return on equity of 24.32% on 30 September 2017. There’s no dividend, but Facebook certainly has the money to pay out a great one if Zuckerberg and company want to.
How Fraud Threatens Facebook’s Future
There is a gigantic threat to Facebook’s future; that was partially exposed by the fake news scandal surrounding last year’s U.S. presidential election. It is fraud, and the potential level of fraud is so great it might derail Facebook’s breakneck growth.
Advertisers alone lost $12.48 billion to digital fraudsters in 2016, the Adloox Auditing service estimated. Those losses are projected to grow to $16.4 billion in 2017.
That is just one kind of fraud aimed at just one industry. Facebook’s own internal investigation revealed that up to 10 million Americans viewed questionable political ads on its networks allegedly posted by Russian operatives.
Facebook admits some of its Advertising Does not Work
The same data revealed the ads were not very effective, Facebook’s own press release from October 2, 2017, admitted:
“Roughly 25% of the ads were never shown to anyone. That’s because advertising auctions are designed so that ads reach people based on relevance, and certain ads may not reach anyone as a result.”
Congress and the media will not notice such remarks but advertisers certainly will. Some of them are already slashing advertising budgets, Proctor & Gamble (NYSE: PG) reportedly cut its digital advertising spending by $140 million during second quarter 2017, Advertising Age claimed.
P&G also reportedly stopped using one popular social media channel, Alphabet’s (NASDAQ: GOOGL) YouTube entirely because of fraud according to Ad Age. That does not bode well for Facebook’s plans to offer more video content.
Response to Fake News Scandal shows Zuckerberg is a Great Executive
Zuckerberg may have to rethink a lot of his strategies. News reports indicate that he is already doing just that because of the political firestorm ignited by Donald J. Trump’s (R-New York) dramatic victory in the U.S. presidential election.
Zuckerberg’s much-hyped road trip across average America; is as much an effort to gauge Facebook’s real effects and distinguish between media hype and fact, as it a testing of political waters. Zuckerberg is prudently trying to see how much effect his technology is really having on real people in the real world.
That’s the behavior of a wise and cautious executive, and exactly what a prudent CEO should be doing in the face of some of the imbecilic political attacks being leveled at Facebook. A good CEO looks beyond the numbers and the “news” and tries to learn what is really going on.
Effective retail executives occasionally get out and walk through their stores and interact with real customers in the aisles. Effective social media executives occasionally go down to the corner bar, or the neighborhood coffee shop, and talk to real people about their products.
That way they can see problems coming and try to fix them before they land on the news websites. It also indicates that Zuckerberg is aware of the weaknesses in his company’s technology and business plan.
This demonstrates another source of value at Facebook: it has great management. The bottom line is that Facebook is a really good company with great resources and tremendous management that makes a lot of money. Nobody will go wrong adding the social network to their portfolio.