Bestinver has fallen in love with Facebook. The investment fund manager controlled by Acciona has published an analysis of the social network in which he considers it “an immense opportunity for the next decades”.
May 30, 2021
In a detailed analysis of the tech giant founded by Marck zuckerberg, the Bestinver investment team explains that the “visible” part Facebook has attributes powerful enough to justify its investment on its own, but what’s interesting is the “Hidden” value that it treasures. “An immense optionality that provides not only extraordinary potential, but a very important additional margin of safety,” say its analysts.
The optionality of Facebook resides in its ability to generate long-term value, something that is not possible to project in a discounted cash flow (DCF) or assigning a valuation multiple. These types of companies “are responsible for the major revaluations of the portfolios of the best investors in the world“.
THE VISIBLE VALUE OF THE SOCIAL NETWORK
First of all, Bestinver considers that Facebook has a attribute series that alone justify their current valuation on the stock market. “It is very difficult not to admire its competitive position, the value it generates for its customers and its extraordinary profitability. A fabulous company, that every investor with curiosity should study and whose valuation, by the way, seems frankly attractive to us “, affirm its analysts.
The business is similar to that of ‘traditional’ media, since sells content to the audience in exchange for advertising. However, it is the users themselves who generate this content when uploading photos, news or videos. This “explains that Facebook much more profitable than traditional media, with gross margins greater than 80% and operating margins greater than 40%“, highlights Bestinver.
Another differentiating factor is the scale and global reach of its platform, since 2.6 billion users use their applications every day. In addition, the data that Facebook stores allows it to offer advertisers highly segmented and highly flexible campaigns, which offer a return on investment much higher than that of a traditional medium.
All this means that this company currently has a competitive advantage that justifies the purchase of your shares on its own. Bestinver’s forecast is for Facebook to achieve “growth in its advertising revenue for the next four years of practically 50%. A growth that the market is not discounting. “
According to its assessment, “at current listing prices and taking into account the cash on the balance sheet, Facebook would be trading at a 6% profitability on the cash flow generated. A super reasonable level for a company of this quality and that offers very remarkable (and very visible) growth over the next few years. “
THE IMMENSE FACEBOOK OPTIONALITY
On the other hand, Bestinver points out that “the interesting thing about the case of the American is the immense optionality offered. An option that provides not only extraordinary potential, but also very important (additional) margin of safety“.
In this sense, they highlight in the first place Whastapp, which currently does not generate profitability but can be an important long-term asset. “Turn WhatsApp into a global “super app” and monetize all the traffic that flows through the application, something similar to what he has achieved Tencent in China with WeChat and its “Mini Programs”, it is a complicated goal. Sure. Complicated, but not impossible, “say these analysts.
Second, they highlight Facebook Shops and Instagram Checkout as levers for “the monetization of social commerce.” “With these new ecommerce features, Facebook’s business becomes much more valuable,” they say.
“Amazon has managed to create an advertising business on its platform of 30,000 million annual sales, growing at 70%. We believe that Facebook can achieve something similar in the medium term, “they add.
Finally, they mention the development of the virtual reality and augmented reality platform. “A longer-term opportunity, more complicated to quantify, but very interesting (as well as exciting)”, they value. “Assuming that in the future the market reaches a size of 70,000 million and that Facebook takes a third of it (compared to almost 60% it currently has), we would be talking about potential sales of 23 billion“, they point out.
In conclusion, Bestinver points out that “the immense opportunity that Facebook offers us for the next decades, together with the margin of safety you provide us today, constitute your Option Value. A formidable Value for which we do not have to pay, but from which, undoubtedly, we want to benefit”.