Facebook (NASDAQ:FB) is a high-growth stock with the opportunity to create massive value for potential investors. Value investors have to be able to look beyond price-earnings (P/E) ratios and look at the underlining economics of the business.
Some of Warren Buffett (Trades, Portfolio)’s best investments were when he paid four times net tangible asset or 20-plus times P/E for a business. Clearly, Buffett and Charlie Munger look beyond P/E ratios.
Why would a value investor think of investing in Facebook and writing an article about it? That is the question I’ve been asking myself for a few weeks. I’ve read everything I can find on Facebook from its financial statements to other articles written about the company. After spending more time than I had to, I’ve learned Facebook is a strong growth stock that is still growing rapidly. A company with a $300 billion-plus market growth at double digits is shocking since only a few large companies can achieve that kind of growth rate. This creates great opportunities since Facebook is still growing its business value at a high rate.
Based on P/E ratio and other traditional value metrics Facebook looks grossly overvalued. However, sometimes a company looks overvalued when in reality it's undervalued. Facebook will easily sell in the high $700 per share range 10 years from now.
Thanks to the leadership and genius of Mark Zuckerberg, Facebook has seen massive growth on all fronts. He has acquired both Instagram and WhatsApp over the last few years for prices that shocked the market and analytics. Facebook operates a social networking web site with 1.7 billion users. The company’s products are Facebook, Instagram, Messenger, WhatsApp, and Oculus.
Facebook’s products enable people to connect and share through mobile devices and personal computers. Third quarter net income increased 166% and diluted earnings per share increased 165%. Facebook reported 56% growth in total revenue and has 1.65 billion mobile users. Over 50% of Facebook's active users access the site through mobile devices.
Facebook's business segments
Facebook site – 1.7 billion users.
Messenger – 1 billion users.
WeChat – 1 billion users.
Instagram – 500 million users.
Through Facebook’s various sites and mobile application the company has create a large economic moat to protect and expand its adversing base. Facebook has been able to continue to grow its users base despite competitors like SnapChat and Twitter (NYSE:TWTR). Both have failed to overtake Facebook as the largest social networking site in the world. This proves that Facebook has a strong and deep competitive advantage over its competitors.
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