Will Facebook become overpriced?
Everybody it seems likes Facebook (NASDAQ: FB) these days, even Jim Cramer. The Mad Money maniac thinks the social network’s share price will rise to $160 and I think he is right.
The big question here is whether it will stay at that price, rise further or suddenly collapse. There is certainly a lot of bubble potential at Facebook, but it’s also a very solid growth stock. Unlike Netflix (NASDAQ: NFLX) Facebook is really growing and making money.
A glance at ycharts reveals that Facebook’s revenues grew by $2.39 billion during the second quarter of 2016. The company’s revenues exceeded $20 billion for the first time; rising from $19.77 billion in March 2016 to $22.16 billion on June 30, 2016.
That revenue growth is no fluke, during the year that ended on June 30, 2016, Facebook added $7.52 billion in revenue. It started year with $14.64 billion in revenues in June 2015 and ended with $22.16 billion in June 2016.
Facebook is Actually Making Money
The astounding thing is that unlike other social media companies such as Twitter (NYSE: TWTR); Facebook is actually making a lot of money.
Facebook reported a net income of $6.022 billion on June 30, 2016. Twitter reported a “net income” of -$408.87 million on the same day. Simply generating a net income is an impressive feat for a social media company, but Facebook did some even more astonishing.
Its net income is actually growing at an astounding rate; Facebook’s net income increased by $1.336 billion during second quarter 2016. The social network started the quarter with a net income of $4.686 billion in that grew to $6.022 billion in June 2016.
Facebook has a Lot of Float
The other financial numbers; provided by ycharts, indicate that Facebook has a lot of float. Intriguingly the social network now generates so much extra cash it is looking like a value investment.
Numbers for June 30, 2016, that prove Facebook has a lot of float include:
- A free cash flow of $2.203 billion.
- Cash and short-term investments of $23.29 billion.
- $1.524 billion in cash from financing.
- $11.20 billion generated by cash from operations.
- $55.74 billion in assets.
These figures show us that Facebook now has enough money in the bank to pay off its total liabilities; which were $5.356 billion on June 30, 2016, buy Twitter (which had a market capitalization of $11.80 billion on August 1, 2016) and have money left over. That is definitely what I call a value investment because it indicates a company with a lot of cash.
To make things even more interesting Facebook’s bank account is actually growing. The social network had $18.43 billion cash and short-term investments in December 2015, that number grew to $20.62 billion in March 2016 and $23.29 billion in June 2016. Facebook’s cash and short investments increased by $7.46 billion during the first six months of 2016.
Facebook’s Weird Dividend Situation
This will have dividend investors’ mouths watering, even though the common stock does not pay a dividend at this time. Instead of traditional cash dividend, Facebook intends to issue nonvoting Class stock as a one-time dividend, Business Insider reported.
“For each outstanding Class A and Class B share held by our stockholders, Facebook intends to issue two new Class C shares as a one-time stock dividend,” a Facebook press release from April states. “The Class C shares will have the same economic rights as the existing Class A and Class B shares. The primary difference is that the Class C shares are non-voting.”
The date of the stock dividend hasn’t been announced yet because Facebook’s board has to approve it. Despite that it’s still a really good deal for investors because they will be rewarded with more Facebook stock if this goes through.
Dividend investors should certainly watch Facebook, because it has the resources to issue a huge dividend at some point. Although I doubt it will issue a cash dividend anytime soon because there’s no reason to do so. The stock is selling like hotcakes without a traditional dividend, so there’s no reason to issue one.
All this indicates that Mark Zuckerberg might be a financial genius on the order of Warren Buffett or Larry Page. He’s certainly innovative and capable of making a lot of money when he wants.
Mark Zuckerberg’s Social Media Empire
Facebook is a good buy for the future because it owns social media. The three top social media products in the world are Facebook solutions, data from Statista in April 2016 indicates.
These products are:
- Facebook itself with 1.59 billion users worldwide.
- The messenger app WhatsApp with one billion users worldwide.
- Facebook Messenger with 900 million users worldwide.
If all that was not enough Facebook owns Instagram which has 400 million users as well. If the data collected by Statista in April 2016 is accurate, Facebook’s might have up to 3.89 billion users. That number should be viewed with skepticism because there is undoubtedly some overlap because man users have accounts more than one social media service.
There has to be some serious overlap because Statista estimated that there are only 2.22 billion social media users in the world in 2016. That number is projected to grow to 2.39 billion in 2017, 2.55 billion in 2018 and 2.72 billion in 2019.
Although we can safely surmise that almost every social media user on earth might be using a Facebook product. If that theory is true, Facebook now has the greatest communications network of any organization in history, its media now reaches nearly one third of the world’s population.
The global population is currently estimated at around 7.05 billion, and 33% of 7.05 billion is 2.44 billion. That means Facebook might soon be in a position to connect one out of three people in the world.
We Could See Facebook at $200 or $300 a Share
Given its’ history of making money from social media, Facebook’s potential for revenue generation is vast. That means Cramer might be underestimating Facebook; given its resources and Zuckerberg’s ability to make money, a $200 or $300 share price for Facebook at some time in the next two or three years is well within realm of possibility.
If you want your portfolio you should consider adding Facebook to it now. This stock may have more growth potential than anything else in the market right now.
