Valuentum Exclusive Analysis for the Discerning Investor

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Facebook is becoming a value investor’s dream: a stock with fantastic free cash flow generation and balance sheet health dealing with transient headline noise. We’re waiting for shares to start to turn upward before we would consider adding to the hypothetical weighting in the simulated Best Ideas Newsletter portfolio. They look cheap!

By Brian Nelson, CFA

Facebook’s (FB) fall from grace has been a dream come true for many value investors looking for a company with a pristine balance sheet and tremendous free cash flow generation. By a pristine balance sheet, we mean a huge net cash position (~$41.7 billion) and no debt. By tremendous free cash flow generation, we mean that Facebook hauled in $5.4 billion in free cash flow during the fourth quarter of 2017, more than 40% of revenue and nearly double that of levels just two years ago. For value investors, the stars are aligning for a rare find in a frothy stock market, and we can barely hold back our excitement!

But we are holding back. There is a saying that “only fools rush in,” perhaps made famous by Elvis Presley, but still, the saying may be as relevant in love as it is in stock investing. Anybody that has been following the General Electric (GE) saga knows how important it is to veer away from falling knives, “Avoiding Troubled Equities Such as General Electric,” and while we think Facebook is far from a value trap, it does us no harm by waiting until the dust settles and the prevalence of "scary" headline news slows down. From Facebook facing a Federal Trade Commission privacy inquiry to CEO Mark Zuckerberg deciding to testify before Congress, the media waves will be overflowing with Facebook news, and most of it will be negative. It will.

As much as we don’t like the recent developments, especially as it relates to the alleged leaking of user data, “Market Overreacts to Facebook News,” this presents a great opportunity for Facebook to deliver on security and privacy initiatives under the microscope of Congress (or under new regulations) to pave the way for ever-increasing trust from the public. Over the long run, we don’t think steps to improve its product can be viewed as a “bad thing,” and while conflicting opinions will proliferate, we continue to believe Facebook’s best days are in the future. Facebook's product may only get better from this, and we think any setbacks will be one-time in nature. We still like the company’s valuation a lot, “Facebook – Still One of Our Favorites.”

That said, we continue to watch the company’s share-price performance closely, and in the event shares meaningfully turn upward, Facebook might meet the definition of a Valuentum stock. Until then, we’re watching its share price and developments closely. Expect the wave of negativism to continue, and we don’t think Twitter (TWTR) or Alphabet (GOOG, GOOGL) and others will be immune to any potential increased regulation with respect to user data either. Our fair value estimate of Facebook remains at $238 per share, and while it has been a long time since we’ve grown this excited about a stock, patience is still in order! Picking the bottom precisely is virtually impossible, and it could be some time yet.

Related: SOCL, MILN, SNAP

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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.