Why I Recently Bought Shares In Facebook And Google
|May 6, 2018||Posted by Oddmund Grøtte under Stock Analysis|
Regrettably, I have not been a shareholder in these two companies until now. I have been dead wrong. My only excuse is I have never used their services often and hence not paid attention. In late April I bought shares in both companies, some years too late, but I still think there is plenty of room for appreciation in the stocks.
Both companies have a an incredible strong moat due to the networking effect. Look at Facebook: half the world have a profile! 2.2 billion people use FB monthly according to their latest quarterly report. I also have a Facebook profile, even though I almost never publish or share anything, and quite frankly I don’t use it much. I simply have the profile because everyone else is there and I want to be reachable. The networking effect means they can fend off any predators and keep their “monopoly”.
Both companies are by no means cheap: they are trading at about 30 times 2017 free cashflow. However, I still think they have a long runway ahead of them with plenty of growth, but of course it will gradually decrease. Hence, I believe both stocks offer a pretty good risk/reward, also relatively: I believe they are substantially cheaper than the expensive market. Compare to for example Procter & Gamble, with forward earnings of about 18 and low growth, I consider FB and GOOG as very cheap because of much higher growth.
FB makes 40 cents in free cashflow for every dollar in turnover. GOOG makes 28%. Astonishing! CAPEX is of course very low with 15% of revenue for FB and 11% for GOOG.
There are plenty of ways to capitalize on the networking effect. For example FB last week revealed it will set up a dating service. Considering all the users they have, I believe this is a smart move. 26% of the US population is already paying for a dating service.
Key metrics for FB:
Key metrics for GOOG:
Neither company has any debt to speak of. But both companies have an enormous cashpile: FB has 41 billions USD in excess cash while GOOG has 96 (that is 8% and 14% of current market capitalization), which makes the companies equally cheaper (in my opinion). In the future you can expect the cash to be returned to shareholder one way or another through buybacks or dividends (or both). Because both are US companies, it is highly unlikely management will spend the cash unwisely.
I don’t see many risks. But the biggest threat is regulatory issues. However, the #DeleteFacebook campaign has already passed with hardly any damage at all. Again, the networking effect comes to rescue: Anyone who has built up a following on FB, will never give away this easily. Hence, #DeleteFacebook are more or less forgotten already.
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