Hi, I’m Jimmy in this video we’re looking at Facebook stock ticker symbol FB. We’re gonna look quickly at Facebook as business and then add some of their numbers and then we’re going to try to value Facebook stock using a discounted cash flow analysis. Okay. So let’s jump right into Facebook business. So Facebook core business is the Facebook platform where they have more than a billion and a half daily users and almost two and a half billion monthly users. Okay. Now, I’m sure most of us know that if not the numbers themselves, certainly we know that they’re a huge platform. So on top of that, Facebook also has platforms like Instagram, Messenger, WhatsApp, they have Oculus and then they’re trying to launch their own digital currency called Libra. Now, those numbers I just mentioned a second ago. Well, that’s just Facebook. I believe that they have something like two point seven billion unique viewers on all of their products combined. So if we were to use, let’s say, Facebook and Instagram, we only count as one unique viewer. Okay. So that’s big. And clearly, the majority of their revenue is driven through advertising. And this is their revenue and of this revenue. There’s a chart of the revenue, end of this revenue. Ninety nine percent more than ninety nine percent is generated from advertising. So in 2018, they had about fifty six billion dollars in revenue. And then in 2020, analysts are estimating green bars, those analyst estimates, they’re expecting for them to have over eighty five billion dollars. Now, these revenue numbers aren’t just Facebook. They’re everything that Facebook have. So Instagram, Messenger, WhatsApp, all of that. Instagram has been pushing the Instagram story ads that’s done a decent job of keeping their revenue growth going. They also have ads and messenger WhatsApp. Either way, Facebook is huge. And they one of their biggest value propositions to potential advertisers is that they have a ton of data on all their users. And this can be quite helpful when advertisers want to target a specific audience and they usually do. And I’m sure that many of us have heard that this has gotten Facebook into a lot of hot water with the government lately. So about halfway through 28, 19, Facebook got hit with about a five billion dollar fine by the FTC. Plus the FTC came out and said that they’re going to have stricter oversight over what Facebook, how they’re managing their privacy. Now, this is important because this has the potential to restrict how much data Facebook can collect from users or maybe how they can use that data. And at first glance, from from our perspective, from a consumer perspective, well, this is probably a good thing. But from a business perspective, from a generating revenue perspective, this has the potential to limit how many custom ads Facebook can offer. And custom ads are way more profitable. So, yes, if big restrictions were to come down, that could seriously restrict how much this revenue continues to grow. Now, I also think it’s important to point out that Facebook, like many companies, is doing whatever they can to keep growing as an example. Just recently, Facebook launched an app called Threads and it’s supposed to be a companion app to Instagram. And basically it allows for us to share our photos or videos or whatever we do on typically on Instagram, on threads except on threads. It only goes to a small group of friends. And this is right in line with the stated goal of Mark Zuckerberg. And ultimately, that is to try to get the platform to be more personal. He believes that the key to the platform success is the ability for smaller groups to form closer and more personal relationships. And in theory, this would increase user engagement, which would ultimately increase revenue. Another way they’re looking to increase revenue is Facebook is recently pushing out Instagram checkout. Now, this is potentially huge for Facebook or really for Instagram in this case. But either way, huge for what this could bring to the company. So Instagram has more active users than eBay and Amazon combined. So the goal with Instagram checkout is for is to allow for users to buy products simply and easily right through Instagram. And since we know that Facebook and Instagram and the whole network of apps. Well, they have a ton of users. And I’m sure we can all imagine if people start buying their products on Facebook or on Instagram instead of on Amazon or eBay or whatever it might be, we can imagine what that would do for their revenue stream and ultimately Facebook stock. OK. So those are, though, some of the key big picture points of what’s going on with Facebook business. Now let’s look at some of the key numbers. So this is revenue, but as I’m sure we can guess and we switch over to net income, which is the same as profit. Well, once again, the bottom line of Facebook looks fantastic. Even when we switch over to net income margins. Well, obviously, this was going to be good. But they have nearly 40 percent net income profit margins in 2010. That’s what they had. And that’s a great number. Good for any year, but to put that in perspective, during 2018, the average company on the S&P 500 put up about profit margins about 10 and a quarter percent during 2018. So almost 40 percent is crazy. Good. Now, as we alluded to, one potential thing that could slow or restrict some of these margins or slow some of the growth is there and the investments that they’re now making into the privacy part of their business. Now, like I said, ultimately, I think that this is going to be a good thing for users. But in the meantime, it’s likely to increase their operating expenses, which will lower free cash flow, lower profits. So this will number of fall and we switch over to free cash flow. That number could get restricted as well. This chart goes back to 2012. And as we could see, the dip in 2018 was really the start of Facebook as regulatory issues. And in 2019? Well, that number is expected to be better than 2018 was, but not quite as high as 2017 was. It’s unexpected, the past, that level until we get to 2020. Once they get to 2020, many analysts are expecting for Facebook stock and Facebook. Revenue and profit to continue growth in a substantial way. And that has the potential for Facebook stock to really take off. So our question is now, what do we think Facebook stock is worth today? Well, this is our discounted cash flow calculation. And as we could see this with this type of valuation technique, it puts the fair value of Facebook stock at about two hundred sixteen dollars per share. Now, let’s run through real quick how we did this. And if you’re curious, this is actually an Excel spreadsheet template that I built. And the goal of it just is to try to help us to sort of step by step come up with a discounted cash flow valuation number. So I did a video on how to do that. If you’re curious, is the link in the description below. You can all email a spreadsheet. It’s free. So if you want it, it’s down below. Okay. So these numbers up here, these are analyst estimates. And what we did is we took analyst estimates and we discount of those by our required rate of return of eight and a half percent. This is typically about where I like to use on a personal basis. And then we used a perpetual growth rate of 2.5 percent to come up with our terminal value. That’s also typically where I like to be from a perpetual growth rate perspective, because I estimate that to be about the long term growth of the economy as a whole. All of this gives us an estimated value of Facebook as a company of about 500, 20 billion dollars. We take that, we divide that by the shares outstanding and we end up with an estimated fair value of Facebook stock of about two hundred sixteen dollars per share. OK, so that doesn’t look too bad, especially when we consider that Facebook current stock price is about one hundred eighty five dollars per share. Now, we may also notice this side here. Now, what this that accounts for is the net debt of the company. So this fair value of to 16 per share. Well, that’s for the whole company. It’s not just the per share value. It’s also the value of the debt. So if a company had a lot of debt, well, this number over here should be lower. Now, we may notice that in Facebook case, the number is actually higher. Why? Because Facebook doesn’t have any debt. And technically, what we’re looking at over here is net debt, which is you take the debt, you offset it by the amount of cash that they have. So this is a chart of Facebook. Cash versus long term debt. And as we can see, they have no long term debt and they have a ton of cash. So when we switch back to this kind of cash flow. Well, that’s what’s happening here. We’re accounting for the fact that they have 40 or so billion dollars in cash. So in theory, you add that to the net value of the company divided by the same number of shares outstanding. And we end up with a fair value of Facebook stock when accounting for the cash position really of about two hundred thirty three dollars. OK. So that’s interesting. But generally, personally, I prefer to use the two hundred sixteen dollars number when it comes to trying to account for where to come up with our entry price. And I did a video on when to buy a stock that is linked in the description below, if you’re curious. But I prefer the 216 dollar number because that’s a more conservative approach in my opinion. The idea of paying for cash in this scenario seems a bit it seems a bit risky. In theory, Facebook could go out tomorrow and go purchase a company with all that cash. All that cash would be gone. Sure, we could make the argument that are the acquisition that they made would add to the value of the company, but it may not depending on the quality of that acquisition. So to me, cash is a bit too fleeting to use that number. It’s interesting to consider, but I wouldn’t if I were buying this company right now. I wouldn’t use that number. I use it to 16. But that’s just my opinion. What do you think? Do you think that Facebook stock is a good buy at one hundred eighty five dollars or so level right now? Please let me know what you think in the comments below. 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