Would you buy this business?
The balance sheet has a pile of cash and no debt. The business benefits from network effects. There’s a long runway for growth in its main segment and optionality to monetize new segments. Management is led by a smart owner-operator that knows how to allocate capital. The company periodically buys back shares.
The stock is trading at a 2022 P/E (excl. cash) of 19x with an FCF yield of 3%. The FCF is understated because it includes growth investments.
Would you buy this business?
Someone said about Tesla: “it’s expensive on what we know and cheap on what we don’t.” That’s a useful framework on how to think about an investment.
The business portrayed here is cheap on what we know and cheaper on what we don’t. Growth is slowing down but will remain double-digits for years to come. The +80% gross margin leaves a large margin for operating leverage and discretionary investments in R&D. The company has yet to monetize some of its most successful segments, which could open new revenue streams and accelerate growth. The large cash pile adds optionality and could be worth multiples of its nominal value if the CEO executes another accretive acquisition, as he has in the past.
Just like any investment, there are risks. Regulation is a major one. But even if this company has to pay large fines, and even if it gets broken down because it got too big and too powerful, the sum of its segments could be worth more than the whole company is worth now.
An investment thesis doesn’t have to be complicated. That’s true for any stock, including the ones followed by hundreds of analysts. In this instance, patience is the investment edge. This stock won’t appreciate overnight due to multiple expansion, but the business will continue to grow and compound capital at attractive rates.
Five years from now, I think we’ll look back and realize that Facebook was a bargain.