Is Facebook cheap? | Finance times

good morning. We do not often go into detail about individual stocks, but the situation on Facebook is too interesting to do without it. We are also interested in your opinion: robert.armstrong@ft.com and ethan.wu@ft.com.

a technical note. We experiment with a new graphic tool. Please have so much patience with us, and soon you will never have to look at a diagram that was cut out and inserted from Excel.

Is Facebook cheap?

Note the title. I boycott the name "Meta platforms" for two reasons. First, "platform" is a filler word that is used to hide confused thinking. Second, I am petty and don't like changes.

As an ethane and I thought about the FT share selection competition, Facebook came up as a potential long position. The stock crashed after a terrible winning report for the fourth quarter and suddenly looked favorable in relation to the profits. Without doing a little more work, however, we were too nervous to choose it. Now we have done a little more work and the share price played along by falling while we did it.

Start with a great assessment comparison. Below are course profit conditions scaled on sales growth, which represents a so-called "PEG" ratio (I use sales and not profit growth because sales are more difficult to manipulate than profit). I compared Facebook to the other "catches" (more precisely "fmaangs"), plus, for the further context, a creaking old technology company and the S&P 500:

On this absurd high abstraction level, Facebook actually looks cheap when the estimates of the consensus analysts are roughly correct. You buy growth for much less than it would cost at any other catch - and actually cheaper than it would cost at IBM or the S&P 500. But the reason for this is how we will see that Mr. Markt does not really believe that the expected sales growth rate of the company will be realized this year or will prove to be a representative of the long -term growth course.

Before we respond to the reasons for this, two points for evaluating in the summary. The Facebook KGV is cheap compared to competitors and the market, but compared to its own history, it is not fantastic cheap. A few years ago, it was traded with a KGV in the middle tens area. I wonder if many stocks may go back to their valuation level before pandemic and Facebook just did it first.

Secondly, Facebook does not act much cheaper than Google (yes, I also boycotte "Alphabet"). So why not just buy Google? It is less competition than Facebook and does not have the problem of Facebook's toxic brand. The best reason not to own Facebook could be Google instead.

continue to slow down growth. The decline in the share price can be explained by somewhat bad results in the fourth quarter and a very bad forecast for the current quarter.

An aspect of the bad results was active user growth that has come to a standstill. I think it is wise to assume that this will be a permanent state. I don't know where you end up with 2.8 billion active users per day.

The other aspect of the bad results was higher expenses, which were mainly associated with investments in the meta personation. I do not know whether money that is put into the meta verse ("an immersive, embodied internet that enables better digital social experiences") will generate long -term strong returns. It is a highly speculative aspect of Facebook's business and should be assessed accordingly. It has a certain option value, but the more urgent question for the investors is how Facebook's Merkewerbeschein will develop in the coming years.

This brings us to guidance, which contained a disgusting forecast of 3 to 11 percent sales growth for the first quarter. To contextualize this: If you enter 7 percent sales growth - the center of this range - in the above rating table, Facebook suddenly looks more expensive than Microsoft.

Management attributed the slowdown to the switch to short videos that are more difficult to monetize than older social media formats, and changes in the data enforcement guidelines of Apple, which Facebook believes that it believes sales of $ 10 billion this year). The company also found that some advertisers streamed their budgets.

These points were widely discussed. A less noticed, but equally dark matter is that the capital investments of $ 18 billion will increase to USD 29 to $ 34 billion this year. One of Facebook's great stimuli is that all of his income is generally converted in free cash flow. That will not happen in 2022.

I think it is a reasonable assumption that Facebook will solve video advertising and distribution problems from Apple by based on the data that extracts it from its huge user base, and on the immense financial resources that are available to him. The company has a good record in solving this kind of problems. I also think that the massive investment in the meta verse will not go on forever. In other words, I suspect that the forecast for the first quarter is not representative of the company's long -term growth course and that Facebook is actually cheap.

Here is a possible kicker. Facebook could turn its guidelines upside down and exaggerate the competitive effect of Tikok and Apple to move the US competition authorities to retreat. The goal would be (among other possible horrors) to avoid forced reversing the Instagram fusion. This is the view of my friend Chris Rossbach, Chief Investment Officer at J Stern & Co. He believes that Facebook is "warding off the cartel [enforcement] by denouncing the competition of TikTok and problems of Apple".

If Facebook is going on, it works. This is from a recently published article in The Economist:

The results of the fourth quarter of the company [Suggest that] His position seems rather susceptible and its winnings a little less breathtaking. It looks like a business with slow growth, an outdated core product and a cost control problem.

This should cause regulatory authorities to rethink their assumptions, says The Economist:

The narrative of the 2010s - from a series of natural monopolies with an almost effortless dominance over the economy and the investment portfolio - no longer reflects reality. Technology changes and an investment thrust change the products that sell technology companies and can lead to a different direction of winners and losers.

Is Facebook so smart? Have you led The Economist behind the light? If so, does the trick also work for regulatory authorities? I have no idea.

Readers have thoughts about Bitcoin

The letter from Tuesday contained a discussion about the different fates of meme shares and crypto, in which we quoted the historian Niall Ferguson, who wrote in Bloomberg. Here is part of what we have quoted:

It is [Bitcoin’s] scarcity that investors like, compared to-as the pandemic has made it clear-the potentially unlimited range of fiat currencies. . . .

. . . I assume that this crypto winter will soon be over. This will follow a spring in which Bitcoin continues its constant progress not only being a volatile option for digital gold, but also a reliable digital gold.

We did not quote Ferguson to prepare the argument that Bitcoin is valuable because it is scarce (which has been chewed and spit out many times). We just wanted to compare the mainstream moment of crypto and the lack of meme shares. Ferguson is influential and his support is a sign of time. But readers would not let the scarcity argument go through. Roger Tauss pointed out:

The argument of the Bitcoin shortage ignores the ease with which new cryptocurrencies are created. The relevant number of offer is not the number of bitcoins, but the entire universe of cryptocurrencies.

Martijn Bron, head of the cocoa chandelner at Cargill, thought a comparison with raw material production was useful:

scarcity is relevant if it refers to a demand that is derived from an economic cycle. This means that if there is a need, an application of an asset in an economic ecosystem [and] scarce supply, then the price increases to finally increase the offer and/or to discourage demand. . .

My assessment is that Bitcoin does not have this application in an economic ecosystem and its main purpose and its main attraction is speculation. And in contrast to raw materials, the demand for Bitcoin increases when the price increases and vice versa, which is typical of speculative hypes.

Bitcoin needs investors more than investors Bitcoin.

The key point of Bron and Tauss is that scarcity itself does not create any value. The fact that only 21 million Bitcoin will ever exist says nothing if there is no application. When the crypto bubble bursts, we and our readers no longer have to repeat these arguments. ( ethan wu )

a good reading

Always read Joseph Wang in his Fed Guy Blog. Here he (for us) gives a new report on how higher key interest rates influence the wealth prices on a broad front. By imposing losses on the bond loan - an "reverse wealth effect" - higher interest rates enforce a realignment of the portfolio.