Facebook Stock Jumped 33% In 2020 – Is It A Buy As We Begin 2021?
Back in October I showed you 3 Reasons To Buy Facebook – And 1 Not To…
Today, I give an update and answer – Facebook Stock Jumped 33% In 2020 – Is It A Buy As We Begin 2021?You can read the past article in full using the link above.
But if you don’t want to; here’s a quick recap of the them before we get to today’s article.
Facebook (FB) is the world’s dominant social network. With as of this writing an estimated 2.7 billion active monthly users.
It also owns WhatsApp which has 2 billion users. And Instagram which has an estimated 1 billion monthly active users.
It dominates these arenas so much that as of this writing it’s the 5th largest company in the world with a $753 billion market cap.
Because of its dominance it earns huge profits and cash flows which is reason #1 to consider buying its stock.
Facebook Earns Huge Profits
Over the last decade it earned an average operating income margin of 39.4% per year.
I look for anything above 10% on a consistent basis… Why?
Because after evaluating thousands of companies over the last 14 years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit margins above 10% over extended periods.
Another way to show you the power of Facebook is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 29.5% per year on average.
I call this the “Cash Machine” metric.
If companies are consistently above 5% on this number, it makes the company a cash machine that spits out a ton of cash.
Facebook surpasses my thresholds on both important metrics. This not only makes it an incredibly safe investment. But it also means its one of the best operating businesses in the world in terms of profits and cash flows.
These profits also allow it to continually reinvest in operations which is how it’s become so dominant.
These profits also allow another layer of safety because Facebook’s business is protected from negative effects of the coronavirus… Which is reason #2 to consider buying its stock.
The Coronavirus Won’t Harm Facebook
People may stop paying their mortgages.
They may stop paying their credit cards.
They may stop paying their vehicle loans.
And they may stop paying their student loans.
Because of the economic issues we’re now dealing with today; people may stop paying these things if they need to.
But people won’t stop using social media… And most advertisers won’t stop advertising on the platform because its where they can reach the most people.
Especially since people have more “free time” than ever while stuck at home. And this likely to continue for the with the pandemic still raging in the US and worldwide as of this writing.
This was proved out on July 30th, 2020 when Facebook released its most up to date quarterly earnings.
- Revenue was up 11% on a year-to-year basis to $18.7 billion.
- Daily active Facebook users were up 12% on a year-to-year basis to 1.79 billion.
- And Monthly active users were up 12% on a year-to-year basis to 2.7 billion.
These things combined give enormous stability to the company in these highly uncertain times… Which also allows it to have ultra-low debt levels.
This is reason #3 to consider buying its stock.
Facebook Has Almost No Debt
With Facebook being the 5th largest company in the world based on market cap you might expect it to have a ton of debt… But it doesn’t.
As of this writing it has only $10.5 billion worth of debt compared to $58.2 billion in cash.
This is possible due to the huge profits and cash flows it earns from its dominant competitive advantages. Combined with the stability of the coronavirus not harming its business.
The three things I’ve already talked about make it a safe investment to consider buying…
But what about its valuation? Is it cheap?
Facebook Is Not Cheap
This is the one reason to avoid Facebook stock right now…
Its current P/E is 32.3.
Its current P/CF is 22.9.
And its current forward P/E is 24.9.
I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…
Facebook is above this threshold.
Why below 20?
Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.
When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.
This means you have a better chance of earning higher returns owning its stock over time. And these things combined make it a less risky investment.
With Facebook being overvalued it means there’s far less margin of safety owning its stock. This means you have a lower chance of earning high investment returns owning its stock going forward. And these make investing in it riskier.
Even with all the wonderful things I said about it above considered.
If you’re looking for a solid, safe, stable, dominant, and enormously profitable stock to protect your investment portfolio – consider buying Facebook… But only when it’s cheaper.
So far this thesis to avoid Facebook Stock has continued to play out… Sort of.
For the full year 2020 its stock jumped 33%.
But since mid October when I last wrote you about it, its shares are flat. While profits rose in the last quarterly results released on October 29th, 2020.
When this happens, the stock gets cheaper… But is Facebook now cheap enough to buy? Unfortunately, no.
Its P/E is now 31.1.
Its current P/CF is 23.3.
And its current forward P/E is 25.1.
Its about as overvalued as it was back in October even though earnings rose… Why?
Because earnings didn’t rise a ton in the last quarter while its stock remained flat.
This overvaluation makes investing in its stock riskier… And it also means you should expect lower returns owning its shares going forward.
For these reasons I continue recommending you avoid buying new Facebook stock as we head into 2021.
I’ll keep you updated if this changes.
Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above