Valuentum Exclusive Analysis for the Discerning Investor

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Dec 10, 2020

FTC Attacks Facebook, Win-Win Scenario for Investors
Image Shown: Facebook Inc has a large digital advertising business with global reach, but it does not have a monopoly on digital advertising or social media by any means. Image Source: Facebook Inc – Third Quarter of 2020 IR Earnings Presentation. Facebook is being sued by the FTC for allegedly engaging in monopolistic activities via its acquisition program. It's important to note that the government is not seizing Facebook's assets and that Facebook investors own the future free cash flow stream of the entire entity under any and every scenario--whether Facebook is retained in current form or whether it is broken into different parts through a potential IPO/spin-off of its Instagram and WhatsApp properties. Under a status quo scenario, we believe Facebook's shares are worth $413 each, an estimate that is backed by the company's vast net cash position and future expected free cash flow stream. In such a scenario, the company would remain one of our favorite ideas, retain its material competitive advantages (i.e. the network effect) and continue to build upon its very healthy financial profile. Further, in light of the FTC news, we believe the market will look to price Facebook more and more on a sum-of-the-parts basis, which could help to accelerate price-to-estimated fair value convergence relative to our intrinsic value estimate. In a highly improbable break-up scenario, Facebook investors could receive more than our status-quo intrinsic value estimate. The IPO market is very, very healthy at the moment, with investor interest in new issues at historic highs and many recent IPOs soaring on their first day of trading. If Facebook is forced to IPO Instagram or WhatsApp, the very, very healthy IPO market could generate proceeds for Facebook investors far in excess of what the implied value of Instagram and WhatsApp contribute to our current $413 per share fair value estimate of the combined company. Further, the cash proceeds of an IPO of Instagram or WhatsApp would stuff the coffers of Facebook's balance sheet with even more excess cash that could be used for material share buybacks or a vast one-time cash dividend--or for other value-generating opportunities. In an IPO or spin-off of Facebook's Instagram or WhatsApp properties, please note that investors are merely capturing the present value of these properties' future free cash flows sooner (not losing them)--and the market may price them at a substantial premium above our implied valuation within Facebook. The FTC news, which was largely expected, will generate headline risk for Facebook's shares, and it will undoubtedly be a source of continued share-price volatility and confusion for investors. In many respects, however, the FTC's attack on Facebook may turn out to be a win-win for Facebook investors. At the very least, if investors start to look at Facebook more and more on a sum-of-the-parts basis (pricing Facebook, Instagram and WhatsApp separately with consideration of current market conditions/relative prices, which are undoubtedly healthy for new issues), it may only accelerate status-quo-scenario price-to-fair value convergence. Facebook remains a top-weighted holding in the Best Ideas Newsletter portfolio, and we will continue to follow developments related to the FTC news.

Oct 22, 2020

Overweighting Outperformers
Image: The performance of ideas in the Best Ideas Newsletter portfolio during the trading session October 21. Many of the higher-weighted ideas in the newsletter portfolio are propelling the portfolio to relative outperformance. The Best Ideas Newsletter portfolio comprises a portfolio constructed of Valuentum's best ideas. These are companies that have scored favorably on the Valuentum Buying Index (VBI) and have been included in the newsletter portfolio with consideration of sector diversification and market/economic risk. The Best Ideas Newsletter portfolio is found in the Best Ideas Newsletter, which is released on the 15th of each month. Source: Seeking Alpha.

Oct 9, 2020

The Resilience of the US Digital Advertising Market and Alphabet
Image Shown: Shares of Alphabet Inc Class C shares, a top-weighted holding in our Best Ideas Newsletter portfolio, have performed very well over the past year. Going forward, we see room for significant capital appreciation upside as the digital advertising market has proven to be very resilient of late. To ride out the ongoing coronavirus (‘COVID-19’) pandemic, we continue to prefer large-cap tech companies with pristine balance sheets, strong cash flow profiles, and promising long-term growth outlooks. Ideally, we are searching for companies with outlooks that are supported by secular growth tailwinds, allowing for several winners in their respective end markets. Digital advertising is a prime example of a resilient high-quality market that is supported by secular growth tailwinds. Alphabet perfectly bits the bill given its ~$117.1 billion net cash position at the end of June 2020 (not including ~$13.0 billion in non-current non-marketable securities, and with no short-term debt on the books), and considering it generated over $14.0 billion in free cash flow during the first half of 2020 alone. We include Alphabet Class C shares as a top-weighted holding in our Best Ideas Newsletter portfolio, and the top end of our fair value estimate range sits at $1,795 per share of GOOG.

Sep 29, 2020

Facebook’s Promising Growth Outlook
Image Shown: Top-weighted Best Ideas Newsletter portfolio holding Facebook Inc has seen its stock price surge higher over the past year and we see room for considerably more capital appreciation upside. Facebook’s growth trajectory will depend in large part on how effective the firm is at generating more revenue per active user, especially in markets outside of the US & Canada. The emergence of a large global middle class should assist in these endeavors. We view Facebook’s growth outlook quite favorably and continue to be big fans of the social media giant. Facebook continues to be one of our favorite companies out there. Shares of Facebook are included as a top-weighted holding in our Best Ideas Newsletter portfolio. Our fair value estimate for FB sits at $284 per share, though should the firm outperform our “base case” assumptions, Facebook could carry a fair value estimate as high as $355 per share. We are enormous fans of Facebook’s net cash balance (~$58.2 billion in net cash at the end of June 2020), high quality cash flow profile (relatively modest capital expenditures are required to maintain a certain level of revenue), and incredibly promising long-term outlook that is supported by secular growth tailwinds.

Aug 25, 2020

Facebook Hits Another All-Time High!
Image: The Valuentum Buying Index is not a stair-step trading strategy, and we view only 9s and 10s and 1s and 2s as material considerations to consider buying or consider selling criteria. We have held prior 9s and 10s in the newsletter portfolios until they reach our fair value estimates, until their technicals roll over, until they register ratings of 1 or 2 on the VBI, or due to changes in certain criteria with respect to market conditions or overall portfolio constitution. Our best ideas remain in the newsletter portfolios and Exclusive publication.Top-weighted idea in the Best Ideas Newsletter portfolio Facebook has hit another all-time high!

Aug 6, 2020

Facebook’s Growth Story Continues
Image Shown: Shares of Facebook Inc are up ~23% year-to-date as of the end of normal trading hours on August 3. We continue to like shares of FB as a top-weighted holding in our Best Ideas Newsletter portfolio, and we see room for meaningful capital appreciate upside.We continue to like Facebook as a top-weighted holding in the Best Ideas Newsletter portfolio, and we see ample room for further capital appreciation as our fair value estimate sits at $284 per share, far above where shares of FB are trading at as of this writing. Additionally, the top end of our fair value estimate range sits at $355 per share of Facebook. Recent technical strength seen at shares of FB indicates that investors are starting to really warm up to Facebook’s high-quality business model, promising growth outlook, and pristine balance sheet.

Apr 7, 2020

24 in a Row! Order the Exclusive Today!
Image Source: An excerpt from the March 2020 edition of the Exclusive publication. Valuentum offers commentary across the capital stack in the Exclusive publication. In the Exclusive publication, Valuentum highlights three new ideas each month to consider, one for income, one for capital appreciation, and a "short" idea (all three outside our existing coverage universe). Through March 2020, the success rate for capital appreciation ideas is 84%+ and an incredible 95%+ for short-idea considerations. As of this writing, the Exclusive is currently on a short-idea win streak of 24 in a row! Make sure the Exclusive is part of your Valuentum membership.

Jan 30, 2020

Debt-Free Facebook’s Free Cash Flow Surges 38%, Adds to Buybacks
Image Source: Facebook Q4 2019 slides. Revenue growth at Facebook remains solid, if not impressive. The market didn’t like Facebook’s fourth-quarter 2019 report, but we didn’t see anything to be concerned about. Revenue is growing like a weed, the firm’s operating margins have come roaring back, free cash flow is surging, its balance sheet is net-cash-rich with no debt, and the firm is buying back underpriced stock. We think the market is too focused on the annual reported numbers and less focused on the many opportunities Facebook has ahead of it. While revenue growth will inevitably slow for a huge company as Facebook and cost pressures will remain prevalent, this company is doing well. The firm remains a key holding in the Best Ideas Newsletter portfolio. Our fair value estimate is unchanged at $234 per share.

Jan 9, 2020

ALERT: Facebook at All-Time Closing Highs
"I'm completely baffled by Facebook's pricing action, and I still think this one will again return to new highs." -- Nelson, December 20, 2018, with shares trading at ~$130 each. Shares of Facebook registered an all-time closing high of $218.30 per share January 9, 2020.

Jul 11, 2019

Valuentum Exclusive Yearly Round Up
"I want finance to learn from the past, the quantitative mistakes of yesteryear that brought the world economy to its knees. The misaligned incentives that created a massive bubble and subsequent housing market crash. The problems of leverage in yet another quant hedge fund Long Term Capital Management that caused panic in the late 1990s. Wall Street is not learning from history, and many are going wildly down the path of destruction. Don’t confuse indexing with a bull market. Pay attention to what you own. Stay diversified, and most of all, do your own due diligence." -- President of Investment Research, Brian Nelson, CFA