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2021-06-30
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Facebook Could Be A $500 Stock After Court Tosses FTC Case
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With yesterday's wins in federal court, some potential headwinds around litigation are clearing up. I'm now quite bullish on the stock and I think the stock price could be over $500/share by the end of the year.</p>\n<p><b>Facebook scores two wins in court</b></p>\n<p>Facebook scored a significant legal and regulatory victory yesterday with wins in two cases in which they were sued by the Federal Trade Commission (FTC) and a number of states. Not only are they near-term wins for the company, and but also for reasons I'll discuss in the next section I think they also bode well for the company's future regulatory prospects.</p>\n<p>In the first case, the Federal Trade Commission (\"FTC\") claimed Facebook had gained monopoly power first through its acquisitions of Instagram and WhatsApp and second through making them inoperable with other platforms. The FTC sued for an injunction that would force Facebook to reverse or unwind the acquisitions and make them open their platform to other programs.</p>\n<p>The court held for Facebook and against the Federal Trade Commission(\"FTC\") on two important items and against Facebook on one. First, the court held that the FTC did not show that Facebook had monopoly power in the field of personal social networking by showing that it had more than 60% market share in that field. Second, the court found the FTC waited too long to seek an injunction against the company. But third, the Court thought it might be possible for the FTC to replead its case seeking an injunction against Facebook for anti-competitive conduct under a different legal standard (see pages 50-53).</p>\n<p>In the second case,the court held even more strongly in favor of Facebook and dismissed the states' claims. The states also sued claiming that Facebook was using monopoly power to keep competitors out and that acquiring Instagram and WhatsApp created a monopoly. The court dismissed both claims saying that first, the states had waited too long to bring their suits and that second, there was nothing illegal under current law to require Facebook to make its services interoperable.</p>\n<p>Legally, we can expect a few things. First the states will probably appeal the dismissal of their suit. I don't see this as a big issue. Parties lose lawsuits all the time and they appeal all the time without changing the result. What happens to the FTC suit is much more interesting.</p>\n<p>As noted above, while the judge dismissed the states' case, he kept the FTC case open and only dismissed their complaint (the active piece of paper in the lawsuit). He basically invited them to re-file the case under the different law he cited. The FTC has a few strategic choices to make at this point. First, they can appeal the decision to a higher court. Second, they can re-plead the case in the way the judge left open for them. Third, they can start to look for another option to regulate the company (such as passing another law or creating an administrative rule). Fourth, they can start negotiating with Facebook. I surmise they'll work on each of the above.</p>\n<p>Normally, losing a case has an impact on what I would call the \"atmosphere\" or \"momentum\" around an issue above and beyond the impact of this ruling in particular. So in most cases I would expect a federal agency to feel somewhat embarrassed or humbled and that could have an effect on their decision-making going forward. In this case, with a clear opening to re-plead the case and start over, they may not be as \"gun shy\" as one might expect.</p>\n<p>To the third point,there are already a number of members of Congress who wanted to regulate tech companies such as Facebook, and a number of them arereacting to the court decisionsaying that it shows the need for new legislation. The Biden administration'snew FTC chairwoman Lina Khan has a reputation as a tech critic, but I haven't found anything about a plan of hers to regulate Facebook. So all-in-all, there is certainly some desire for a change in law but I can't see anything in the works that could be put into place in the very near term.</p>\n<p>Fourth, litigants are always negotiating and it's entirely possible that Facebook has offered some kind of concessions already that we don't know about. I don't see that as a likely outcome here.</p>\n<p><b>Future Regulation Shouldn't Worry Facebook</b></p>\n<p>Based on experience watching regulations change in Washington and my reading of the political tea leaves, I want to explain why I'm not concerned that regulation will hamper Facebook's business prospects.</p>\n<p>First and foremost, while most people think of regulation as a system for the government to keep companies from doing things the companies want to do, it's just as true that regulation carves out a space for companies to do lots of other things without fear of adverse legal consequences. Moreover, the regulations can often entrench incumbents by making compliance too expensive or burdensome for new competitors. This was probably the case with thewell-publicized FTC settlement with Herbalife(HLF) whose share price has basically doubled since its settlement five years ago:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/5ae2b9ff7e9edb953d2fae3807d1815a\" tg-width=\"640\" tg-height=\"409\"><span>Source: Seeking Alpha</span></p>\n<p>Regulation building a moat to keep out competitors and ensure profits is also probably a good description of what's happened to tobacco companies such as Philip Morris (PM) and Altria (MO). What would it take for someone to start a new cigarette company? Doesn't seem likely to happen anytime soon. A third reason regulation often doesn't end up hurting profits is the phenomenon ofregulatory capturein which the regulator ends up in effect working for the company! So all this is to say that even if regulation is coming, it may not necessarily be all that bad.</p>\n<p>Second, one of the most likely outcomes sought in litigation is divestiture or interoperability of Instagram and WhatsApp - and that may be fine for Facebook. I use WhatsApp every day (it's much more popular outside the US), and I also have other competing programs such as Telegram and Viber on my phone. The other two services seem fine, but no one I know uses them on a regular basis. Moreover, no one I know who uses WhatsApp does so because of a link to Facebook right now. (Facebook would like to link them through Messenger, though). It's possible that WhatsApp has already won the competition by being first, better capitalized or executing better. So WhatsApp spinning off from Facebook just might not make a difference to the businesses. If Facebook is forced to make its service interoperable, they might still be able to charge other companies a fee for using their assets and this really might not be a bad business move. I'm less familiar with Instagram and its competitors such as Snapchat (SNAP), but I think a similar conclusion is likely.</p>\n<p>Third, even though there are good reasons to regulate Facebook around concerns about itseffects on users' mental health,political extremismandmonopoly poweramong other things, I just don't see much happening because of how politics works. (For an interesting views on Facebook and its effects on users and society, seeZucked by Roger McNamee). Politics normally ends up serving the interests of the wealthy and powerful, and Facebook, its executives and shareholders are now wealthy and powerful. Facebook has proven effective inlobbying and managing government relations, and it is increasing its focus on these. Facebook may also have powerful allies in Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and other tech companies which could be wary of further regulations. Right now, a number of the most powerful people in Congress such as Speaker of the House Nancy Pelosi basically represent Silicon Valley which bodes well for Facebook's interests. Even in the event that Republicans take over one or both houses of Congress in the midterms, I don't believe that the recent trend of \"populism\" among many Republicans will overcome the party's core resistance to regulation and support for corporate America.</p>\n<p>So if I had to make a prediction, it would be that Facebook ends up making some kind of concessions that don't affect operations or profitability but allow politicians and regulators to claim that they've accomplished something. This has the added benefit for Facebook of making it less likely that further reform might come in the future.</p>\n<p><b>Facebook's Recent Earnings are great</b></p>\n<p>Even in the Covid-19 effected year of 2020, Facebook's numbers are outstanding and in the most recent quarter they're even stronger. As you can see from this summary of results included in the company's Form 10-K for 2020, earnings and margins are strong and growing:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/f921d22e5694000a51c60e069de30b52\" tg-width=\"640\" tg-height=\"304\"><span>Source: Facebook</span></p>\n<p>Revenue grew by almost $15 billion in each of the previous 4 years, and net income climbed higher and higher for every year except 2019, when its move to $29 billion in 2020 made up for what it lost the year before.</p>\n<p>If all we had to go on were these backwards looking numbers, I would estimate the \"back of the envelope\" value this company by taking multiplying the most recent earnings of $29 billion by 33 for $957 billion and adding excess cash of $62 billion for a <b>market capitalization of $1,019 billion $359/share</b>. Likewise, I would say that valuing it at only 25x last year's earnings plus excess cash yields a valuation of $787 billion, would mean the company was undervalued at a price $277/share. But for the reasons I'll set out below, I think these numbers are too low.</p>\n<p><b>Estimating this year's earning - much, much higher</b></p>\n<p>In the first quarter of 2021, Facebook earned almost $9.5 billion as you can see from this income statement in the most recent Form 10-Q:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/3db9a4108a92e18a59dbb1923cd9c903\" tg-width=\"640\" tg-height=\"174\"><span>Source: Facebook</span></p>\n<p>It's clear that the first quarter of 2020 had a dramatic reduction in business activity from Covid-19. It would be tough to say how much that effected customers in the first quarter of last year, making a direct comparison very difficult. In order to get a good guess what the strong first quarter means for Facebook, I want to compare the company's user statistics to quarterly profits and make some educated guesses.</p>\n<p>Facebook's earnings presentations give us a description of the monthly active users of all the company's products broken down by quarter:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/e25d73bdd71d2f841ab92917e27cee44\" tg-width=\"640\" tg-height=\"429\"><span>Source: Facebook</span></p>\n<p>As well as revenue:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/79d68ef6536f200bbffa310ad257a3ed\" tg-width=\"640\" tg-height=\"430\"><span>Source: Facebook</span></p>\n<p>and net income:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d7d23e558cff9eb15938c953982d5795\" tg-width=\"640\" tg-height=\"381\"><span>Source: Facebook</span></p>\n<p>Looking over these three charts we see that even though monthly average users grow consistently, there is some seasonality to the revenue and earnings.</p>\n<p>I've made my own spreadsheet of this information:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/cd491880ca77778e76d41d367223b669\" tg-width=\"640\" tg-height=\"151\"><span>Source: Author</span></p>\n<p>In light of those numbers showing:</p>\n<p>(1) MAU grows every quarter, but</p>\n<p>(2) Revenue and Net Income change with the seasons,</p>\n<p>I'm willing to make some rough guesses about the rest of this year:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/4c413f3304ab59e2ca2b56822ee4465c\" tg-width=\"640\" tg-height=\"114\"><span>Source: Author</span></p>\n<p>To arrive at these estimate, I kept user growth constant and multiplied revenue by 1.44, 1.4 and 1.3 over its prior year. That's a guess, but I think that having been transparent about how I made my estimates, you can adjust that number up or down as you think best. To arrive at net income, I kept the net income/revenue ratio the same as it had been in the same quarter of the prior year. This captures some of the operating leverage and increasing returns to scale inherent in Facebook's business model.</p>\n<p>I estimated that the company would $9.5 plus $7.2 plus $11 plus $14.5 billion of net income this year, for a total of $42.2 billion. That's quite an improvement over last year's $29 billion!</p>\n<p>If these estimates are reasonable and we assume the company increases cash on the balance sheet to $75 billion, at the not-too-optimistic multiple of 25x earnings for a growing company and including the excess cash, that means Facebook stock could be meaningfully <b>undervalued at a market cap of $1,130 billion or $398/share</b>. Because of the growth we see, I really don't think it's unreasonable to arrive at <b>fair value with a 33x multiple on the stock for $1,461 billion or $526/share</b>.</p>\n<p><b>Global Growth and New Products add upside</b></p>\n<p>The estimates I used in the section above may be too low for two reasons. First, they're not accounting for the increasing returns on Facebook's growth outside the US. Facebook's growth inemerging markets such as Indiais extremely valuable because they have both a long runway for adding users, and the users themselves can be expected to become more profitable as GDP and consumption increase over time at rates faster than those in developed markets.</p>\n<p>Facebook is alsoexpanding rapidly into virtual reality. I don't have any way of estimating how big or how profitable this segment will be, but it's not unreasonable to think they'll have a lead in gaming and social segments and widespread adoption could lead to new kinds of unanticipated uses. For the last several years, spending on research and development has served to push the company's earnings down somewhat, but once they release a commercial product, we could begin to see the fruits of their labor.</p>\n<p><b>Conclusion</b></p>\n<p>With legal and regulatory challenges seeming less difficult and growing profitability, I am quite bullish on shares of Facebook. As always, a number of things could go wrong. If a new political environment becomes much more hostile to \"Big Tech\" or we see the emergence of a social movement to drop Facebook (I've tried to leave a few times myself!) that would depress earnings and change my thesis. At these prices and with this much growth on the horizon, I'm not concerned about those risks. As they say, \"we like the stock.\"</p>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Facebook Could Be A $500 Stock After Court Tosses FTC Case</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFacebook Could Be A $500 Stock After Court Tosses FTC Case\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-06-29 22:29 GMT+8 <a href=https://seekingalpha.com/article/4437058-facebook-500-stock-court-tosses-ftc-case><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nWins in court against the FTC and States clear up regulatory headwinds.\nSubstantial profits will grow throughout the year.\nFacebook may not have much to fear from future regulation either.\n\n...</p>\n\n<a href=\"https://seekingalpha.com/article/4437058-facebook-500-stock-court-tosses-ftc-case\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{},"source_url":"https://seekingalpha.com/article/4437058-facebook-500-stock-court-tosses-ftc-case","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1165468426","content_text":"Summary\n\nWins in court against the FTC and States clear up regulatory headwinds.\nSubstantial profits will grow throughout the year.\nFacebook may not have much to fear from future regulation either.\n\nnaruecha jenthaisong/Moment via Getty Images\nI started analyzing Facebook (FB) last week and I was surprised how bullish my conclusions were about the company's prospects. With yesterday's wins in federal court, some potential headwinds around litigation are clearing up. I'm now quite bullish on the stock and I think the stock price could be over $500/share by the end of the year.\nFacebook scores two wins in court\nFacebook scored a significant legal and regulatory victory yesterday with wins in two cases in which they were sued by the Federal Trade Commission (FTC) and a number of states. Not only are they near-term wins for the company, and but also for reasons I'll discuss in the next section I think they also bode well for the company's future regulatory prospects.\nIn the first case, the Federal Trade Commission (\"FTC\") claimed Facebook had gained monopoly power first through its acquisitions of Instagram and WhatsApp and second through making them inoperable with other platforms. The FTC sued for an injunction that would force Facebook to reverse or unwind the acquisitions and make them open their platform to other programs.\nThe court held for Facebook and against the Federal Trade Commission(\"FTC\") on two important items and against Facebook on one. First, the court held that the FTC did not show that Facebook had monopoly power in the field of personal social networking by showing that it had more than 60% market share in that field. Second, the court found the FTC waited too long to seek an injunction against the company. But third, the Court thought it might be possible for the FTC to replead its case seeking an injunction against Facebook for anti-competitive conduct under a different legal standard (see pages 50-53).\nIn the second case,the court held even more strongly in favor of Facebook and dismissed the states' claims. The states also sued claiming that Facebook was using monopoly power to keep competitors out and that acquiring Instagram and WhatsApp created a monopoly. The court dismissed both claims saying that first, the states had waited too long to bring their suits and that second, there was nothing illegal under current law to require Facebook to make its services interoperable.\nLegally, we can expect a few things. First the states will probably appeal the dismissal of their suit. I don't see this as a big issue. Parties lose lawsuits all the time and they appeal all the time without changing the result. What happens to the FTC suit is much more interesting.\nAs noted above, while the judge dismissed the states' case, he kept the FTC case open and only dismissed their complaint (the active piece of paper in the lawsuit). He basically invited them to re-file the case under the different law he cited. The FTC has a few strategic choices to make at this point. First, they can appeal the decision to a higher court. Second, they can re-plead the case in the way the judge left open for them. Third, they can start to look for another option to regulate the company (such as passing another law or creating an administrative rule). Fourth, they can start negotiating with Facebook. I surmise they'll work on each of the above.\nNormally, losing a case has an impact on what I would call the \"atmosphere\" or \"momentum\" around an issue above and beyond the impact of this ruling in particular. So in most cases I would expect a federal agency to feel somewhat embarrassed or humbled and that could have an effect on their decision-making going forward. In this case, with a clear opening to re-plead the case and start over, they may not be as \"gun shy\" as one might expect.\nTo the third point,there are already a number of members of Congress who wanted to regulate tech companies such as Facebook, and a number of them arereacting to the court decisionsaying that it shows the need for new legislation. The Biden administration'snew FTC chairwoman Lina Khan has a reputation as a tech critic, but I haven't found anything about a plan of hers to regulate Facebook. So all-in-all, there is certainly some desire for a change in law but I can't see anything in the works that could be put into place in the very near term.\nFourth, litigants are always negotiating and it's entirely possible that Facebook has offered some kind of concessions already that we don't know about. I don't see that as a likely outcome here.\nFuture Regulation Shouldn't Worry Facebook\nBased on experience watching regulations change in Washington and my reading of the political tea leaves, I want to explain why I'm not concerned that regulation will hamper Facebook's business prospects.\nFirst and foremost, while most people think of regulation as a system for the government to keep companies from doing things the companies want to do, it's just as true that regulation carves out a space for companies to do lots of other things without fear of adverse legal consequences. Moreover, the regulations can often entrench incumbents by making compliance too expensive or burdensome for new competitors. This was probably the case with thewell-publicized FTC settlement with Herbalife(HLF) whose share price has basically doubled since its settlement five years ago:\nSource: Seeking Alpha\nRegulation building a moat to keep out competitors and ensure profits is also probably a good description of what's happened to tobacco companies such as Philip Morris (PM) and Altria (MO). What would it take for someone to start a new cigarette company? Doesn't seem likely to happen anytime soon. A third reason regulation often doesn't end up hurting profits is the phenomenon ofregulatory capturein which the regulator ends up in effect working for the company! So all this is to say that even if regulation is coming, it may not necessarily be all that bad.\nSecond, one of the most likely outcomes sought in litigation is divestiture or interoperability of Instagram and WhatsApp - and that may be fine for Facebook. I use WhatsApp every day (it's much more popular outside the US), and I also have other competing programs such as Telegram and Viber on my phone. The other two services seem fine, but no one I know uses them on a regular basis. Moreover, no one I know who uses WhatsApp does so because of a link to Facebook right now. (Facebook would like to link them through Messenger, though). It's possible that WhatsApp has already won the competition by being first, better capitalized or executing better. So WhatsApp spinning off from Facebook just might not make a difference to the businesses. If Facebook is forced to make its service interoperable, they might still be able to charge other companies a fee for using their assets and this really might not be a bad business move. I'm less familiar with Instagram and its competitors such as Snapchat (SNAP), but I think a similar conclusion is likely.\nThird, even though there are good reasons to regulate Facebook around concerns about itseffects on users' mental health,political extremismandmonopoly poweramong other things, I just don't see much happening because of how politics works. (For an interesting views on Facebook and its effects on users and society, seeZucked by Roger McNamee). Politics normally ends up serving the interests of the wealthy and powerful, and Facebook, its executives and shareholders are now wealthy and powerful. Facebook has proven effective inlobbying and managing government relations, and it is increasing its focus on these. Facebook may also have powerful allies in Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and other tech companies which could be wary of further regulations. Right now, a number of the most powerful people in Congress such as Speaker of the House Nancy Pelosi basically represent Silicon Valley which bodes well for Facebook's interests. Even in the event that Republicans take over one or both houses of Congress in the midterms, I don't believe that the recent trend of \"populism\" among many Republicans will overcome the party's core resistance to regulation and support for corporate America.\nSo if I had to make a prediction, it would be that Facebook ends up making some kind of concessions that don't affect operations or profitability but allow politicians and regulators to claim that they've accomplished something. This has the added benefit for Facebook of making it less likely that further reform might come in the future.\nFacebook's Recent Earnings are great\nEven in the Covid-19 effected year of 2020, Facebook's numbers are outstanding and in the most recent quarter they're even stronger. As you can see from this summary of results included in the company's Form 10-K for 2020, earnings and margins are strong and growing:\nSource: Facebook\nRevenue grew by almost $15 billion in each of the previous 4 years, and net income climbed higher and higher for every year except 2019, when its move to $29 billion in 2020 made up for what it lost the year before.\nIf all we had to go on were these backwards looking numbers, I would estimate the \"back of the envelope\" value this company by taking multiplying the most recent earnings of $29 billion by 33 for $957 billion and adding excess cash of $62 billion for a market capitalization of $1,019 billion $359/share. Likewise, I would say that valuing it at only 25x last year's earnings plus excess cash yields a valuation of $787 billion, would mean the company was undervalued at a price $277/share. But for the reasons I'll set out below, I think these numbers are too low.\nEstimating this year's earning - much, much higher\nIn the first quarter of 2021, Facebook earned almost $9.5 billion as you can see from this income statement in the most recent Form 10-Q:\nSource: Facebook\nIt's clear that the first quarter of 2020 had a dramatic reduction in business activity from Covid-19. It would be tough to say how much that effected customers in the first quarter of last year, making a direct comparison very difficult. In order to get a good guess what the strong first quarter means for Facebook, I want to compare the company's user statistics to quarterly profits and make some educated guesses.\nFacebook's earnings presentations give us a description of the monthly active users of all the company's products broken down by quarter:\nSource: Facebook\nAs well as revenue:\nSource: Facebook\nand net income:\nSource: Facebook\nLooking over these three charts we see that even though monthly average users grow consistently, there is some seasonality to the revenue and earnings.\nI've made my own spreadsheet of this information:\nSource: Author\nIn light of those numbers showing:\n(1) MAU grows every quarter, but\n(2) Revenue and Net Income change with the seasons,\nI'm willing to make some rough guesses about the rest of this year:\nSource: Author\nTo arrive at these estimate, I kept user growth constant and multiplied revenue by 1.44, 1.4 and 1.3 over its prior year. That's a guess, but I think that having been transparent about how I made my estimates, you can adjust that number up or down as you think best. To arrive at net income, I kept the net income/revenue ratio the same as it had been in the same quarter of the prior year. This captures some of the operating leverage and increasing returns to scale inherent in Facebook's business model.\nI estimated that the company would $9.5 plus $7.2 plus $11 plus $14.5 billion of net income this year, for a total of $42.2 billion. That's quite an improvement over last year's $29 billion!\nIf these estimates are reasonable and we assume the company increases cash on the balance sheet to $75 billion, at the not-too-optimistic multiple of 25x earnings for a growing company and including the excess cash, that means Facebook stock could be meaningfully undervalued at a market cap of $1,130 billion or $398/share. Because of the growth we see, I really don't think it's unreasonable to arrive at fair value with a 33x multiple on the stock for $1,461 billion or $526/share.\nGlobal Growth and New Products add upside\nThe estimates I used in the section above may be too low for two reasons. First, they're not accounting for the increasing returns on Facebook's growth outside the US. Facebook's growth inemerging markets such as Indiais extremely valuable because they have both a long runway for adding users, and the users themselves can be expected to become more profitable as GDP and consumption increase over time at rates faster than those in developed markets.\nFacebook is alsoexpanding rapidly into virtual reality. I don't have any way of estimating how big or how profitable this segment will be, but it's not unreasonable to think they'll have a lead in gaming and social segments and widespread adoption could lead to new kinds of unanticipated uses. For the last several years, spending on research and development has served to push the company's earnings down somewhat, but once they release a commercial product, we could begin to see the fruits of their labor.\nConclusion\nWith legal and regulatory challenges seeming less difficult and growing profitability, I am quite bullish on shares of Facebook. As always, a number of things could go wrong. If a new political environment becomes much more hostile to \"Big Tech\" or we see the emergence of a social movement to drop Facebook (I've tried to leave a few times myself!) that would depress earnings and change my thesis. At these prices and with this much growth on the horizon, I'm not concerned about those risks. As they say, \"we like the stock.\"","news_type":1},"isVote":1,"tweetType":1,"viewCount":132,"authorTweetTopStatus":1,"verified":2,"comments":[],"imageCount":0,"langContent":"EN","totalScore":0}],"hots":[{"id":153148225,"gmtCreate":1625015130967,"gmtModify":1633945857025,"author":{"id":"4087798315837920","authorId":"4087798315837920","authorIdStr":"4087798315837920","name":"Biyueve","avatar":"https://static.laohu8.com/default-avatar.jpg","crmLevel":1,"crmLevelSwitch":0,"followedFlag":false,"idStr":"4087798315837920"},"themes":[],"htmlText":"👍","listText":"👍","text":"👍","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/153148225","repostId":"1165468426","repostType":4,"repost":{"id":"1165468426","pubTimestamp":1624976964,"share":"https://www.laohu8.com/m/news/1165468426?lang=&edition=full","pubTime":"2021-06-29 22:29","market":"us","language":"en","title":"Facebook Could Be A $500 Stock After Court Tosses FTC Case","url":"https://stock-news.laohu8.com/highlight/detail?id=1165468426","media":"seekingalpha","summary":"Summary\n\nWins in court against the FTC and States clear up regulatory headwinds.\nSubstantial profits","content":"<p><b>Summary</b></p>\n<ul>\n <li>Wins in court against the FTC and States clear up regulatory headwinds.</li>\n <li>Substantial profits will grow throughout the year.</li>\n <li>Facebook may not have much to fear from future regulation either.</li>\n</ul>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/e924941f95567d72af0984753c0d9302\" tg-width=\"1536\" tg-height=\"1024\"><span>naruecha jenthaisong/Moment via Getty Images</span></p>\n<p>I started analyzing Facebook (FB) last week and I was surprised how bullish my conclusions were about the company's prospects. With yesterday's wins in federal court, some potential headwinds around litigation are clearing up. I'm now quite bullish on the stock and I think the stock price could be over $500/share by the end of the year.</p>\n<p><b>Facebook scores two wins in court</b></p>\n<p>Facebook scored a significant legal and regulatory victory yesterday with wins in two cases in which they were sued by the Federal Trade Commission (FTC) and a number of states. Not only are they near-term wins for the company, and but also for reasons I'll discuss in the next section I think they also bode well for the company's future regulatory prospects.</p>\n<p>In the first case, the Federal Trade Commission (\"FTC\") claimed Facebook had gained monopoly power first through its acquisitions of Instagram and WhatsApp and second through making them inoperable with other platforms. The FTC sued for an injunction that would force Facebook to reverse or unwind the acquisitions and make them open their platform to other programs.</p>\n<p>The court held for Facebook and against the Federal Trade Commission(\"FTC\") on two important items and against Facebook on one. First, the court held that the FTC did not show that Facebook had monopoly power in the field of personal social networking by showing that it had more than 60% market share in that field. Second, the court found the FTC waited too long to seek an injunction against the company. But third, the Court thought it might be possible for the FTC to replead its case seeking an injunction against Facebook for anti-competitive conduct under a different legal standard (see pages 50-53).</p>\n<p>In the second case,the court held even more strongly in favor of Facebook and dismissed the states' claims. The states also sued claiming that Facebook was using monopoly power to keep competitors out and that acquiring Instagram and WhatsApp created a monopoly. The court dismissed both claims saying that first, the states had waited too long to bring their suits and that second, there was nothing illegal under current law to require Facebook to make its services interoperable.</p>\n<p>Legally, we can expect a few things. First the states will probably appeal the dismissal of their suit. I don't see this as a big issue. Parties lose lawsuits all the time and they appeal all the time without changing the result. What happens to the FTC suit is much more interesting.</p>\n<p>As noted above, while the judge dismissed the states' case, he kept the FTC case open and only dismissed their complaint (the active piece of paper in the lawsuit). He basically invited them to re-file the case under the different law he cited. The FTC has a few strategic choices to make at this point. First, they can appeal the decision to a higher court. Second, they can re-plead the case in the way the judge left open for them. Third, they can start to look for another option to regulate the company (such as passing another law or creating an administrative rule). Fourth, they can start negotiating with Facebook. I surmise they'll work on each of the above.</p>\n<p>Normally, losing a case has an impact on what I would call the \"atmosphere\" or \"momentum\" around an issue above and beyond the impact of this ruling in particular. So in most cases I would expect a federal agency to feel somewhat embarrassed or humbled and that could have an effect on their decision-making going forward. In this case, with a clear opening to re-plead the case and start over, they may not be as \"gun shy\" as one might expect.</p>\n<p>To the third point,there are already a number of members of Congress who wanted to regulate tech companies such as Facebook, and a number of them arereacting to the court decisionsaying that it shows the need for new legislation. The Biden administration'snew FTC chairwoman Lina Khan has a reputation as a tech critic, but I haven't found anything about a plan of hers to regulate Facebook. So all-in-all, there is certainly some desire for a change in law but I can't see anything in the works that could be put into place in the very near term.</p>\n<p>Fourth, litigants are always negotiating and it's entirely possible that Facebook has offered some kind of concessions already that we don't know about. I don't see that as a likely outcome here.</p>\n<p><b>Future Regulation Shouldn't Worry Facebook</b></p>\n<p>Based on experience watching regulations change in Washington and my reading of the political tea leaves, I want to explain why I'm not concerned that regulation will hamper Facebook's business prospects.</p>\n<p>First and foremost, while most people think of regulation as a system for the government to keep companies from doing things the companies want to do, it's just as true that regulation carves out a space for companies to do lots of other things without fear of adverse legal consequences. Moreover, the regulations can often entrench incumbents by making compliance too expensive or burdensome for new competitors. This was probably the case with thewell-publicized FTC settlement with Herbalife(HLF) whose share price has basically doubled since its settlement five years ago:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/5ae2b9ff7e9edb953d2fae3807d1815a\" tg-width=\"640\" tg-height=\"409\"><span>Source: Seeking Alpha</span></p>\n<p>Regulation building a moat to keep out competitors and ensure profits is also probably a good description of what's happened to tobacco companies such as Philip Morris (PM) and Altria (MO). What would it take for someone to start a new cigarette company? Doesn't seem likely to happen anytime soon. A third reason regulation often doesn't end up hurting profits is the phenomenon ofregulatory capturein which the regulator ends up in effect working for the company! So all this is to say that even if regulation is coming, it may not necessarily be all that bad.</p>\n<p>Second, one of the most likely outcomes sought in litigation is divestiture or interoperability of Instagram and WhatsApp - and that may be fine for Facebook. I use WhatsApp every day (it's much more popular outside the US), and I also have other competing programs such as Telegram and Viber on my phone. The other two services seem fine, but no one I know uses them on a regular basis. Moreover, no one I know who uses WhatsApp does so because of a link to Facebook right now. (Facebook would like to link them through Messenger, though). It's possible that WhatsApp has already won the competition by being first, better capitalized or executing better. So WhatsApp spinning off from Facebook just might not make a difference to the businesses. If Facebook is forced to make its service interoperable, they might still be able to charge other companies a fee for using their assets and this really might not be a bad business move. I'm less familiar with Instagram and its competitors such as Snapchat (SNAP), but I think a similar conclusion is likely.</p>\n<p>Third, even though there are good reasons to regulate Facebook around concerns about itseffects on users' mental health,political extremismandmonopoly poweramong other things, I just don't see much happening because of how politics works. (For an interesting views on Facebook and its effects on users and society, seeZucked by Roger McNamee). Politics normally ends up serving the interests of the wealthy and powerful, and Facebook, its executives and shareholders are now wealthy and powerful. Facebook has proven effective inlobbying and managing government relations, and it is increasing its focus on these. Facebook may also have powerful allies in Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and other tech companies which could be wary of further regulations. Right now, a number of the most powerful people in Congress such as Speaker of the House Nancy Pelosi basically represent Silicon Valley which bodes well for Facebook's interests. Even in the event that Republicans take over one or both houses of Congress in the midterms, I don't believe that the recent trend of \"populism\" among many Republicans will overcome the party's core resistance to regulation and support for corporate America.</p>\n<p>So if I had to make a prediction, it would be that Facebook ends up making some kind of concessions that don't affect operations or profitability but allow politicians and regulators to claim that they've accomplished something. This has the added benefit for Facebook of making it less likely that further reform might come in the future.</p>\n<p><b>Facebook's Recent Earnings are great</b></p>\n<p>Even in the Covid-19 effected year of 2020, Facebook's numbers are outstanding and in the most recent quarter they're even stronger. As you can see from this summary of results included in the company's Form 10-K for 2020, earnings and margins are strong and growing:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/f921d22e5694000a51c60e069de30b52\" tg-width=\"640\" tg-height=\"304\"><span>Source: Facebook</span></p>\n<p>Revenue grew by almost $15 billion in each of the previous 4 years, and net income climbed higher and higher for every year except 2019, when its move to $29 billion in 2020 made up for what it lost the year before.</p>\n<p>If all we had to go on were these backwards looking numbers, I would estimate the \"back of the envelope\" value this company by taking multiplying the most recent earnings of $29 billion by 33 for $957 billion and adding excess cash of $62 billion for a <b>market capitalization of $1,019 billion $359/share</b>. Likewise, I would say that valuing it at only 25x last year's earnings plus excess cash yields a valuation of $787 billion, would mean the company was undervalued at a price $277/share. But for the reasons I'll set out below, I think these numbers are too low.</p>\n<p><b>Estimating this year's earning - much, much higher</b></p>\n<p>In the first quarter of 2021, Facebook earned almost $9.5 billion as you can see from this income statement in the most recent Form 10-Q:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/3db9a4108a92e18a59dbb1923cd9c903\" tg-width=\"640\" tg-height=\"174\"><span>Source: Facebook</span></p>\n<p>It's clear that the first quarter of 2020 had a dramatic reduction in business activity from Covid-19. It would be tough to say how much that effected customers in the first quarter of last year, making a direct comparison very difficult. In order to get a good guess what the strong first quarter means for Facebook, I want to compare the company's user statistics to quarterly profits and make some educated guesses.</p>\n<p>Facebook's earnings presentations give us a description of the monthly active users of all the company's products broken down by quarter:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/e25d73bdd71d2f841ab92917e27cee44\" tg-width=\"640\" tg-height=\"429\"><span>Source: Facebook</span></p>\n<p>As well as revenue:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/79d68ef6536f200bbffa310ad257a3ed\" tg-width=\"640\" tg-height=\"430\"><span>Source: Facebook</span></p>\n<p>and net income:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/d7d23e558cff9eb15938c953982d5795\" tg-width=\"640\" tg-height=\"381\"><span>Source: Facebook</span></p>\n<p>Looking over these three charts we see that even though monthly average users grow consistently, there is some seasonality to the revenue and earnings.</p>\n<p>I've made my own spreadsheet of this information:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/cd491880ca77778e76d41d367223b669\" tg-width=\"640\" tg-height=\"151\"><span>Source: Author</span></p>\n<p>In light of those numbers showing:</p>\n<p>(1) MAU grows every quarter, but</p>\n<p>(2) Revenue and Net Income change with the seasons,</p>\n<p>I'm willing to make some rough guesses about the rest of this year:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/4c413f3304ab59e2ca2b56822ee4465c\" tg-width=\"640\" tg-height=\"114\"><span>Source: Author</span></p>\n<p>To arrive at these estimate, I kept user growth constant and multiplied revenue by 1.44, 1.4 and 1.3 over its prior year. That's a guess, but I think that having been transparent about how I made my estimates, you can adjust that number up or down as you think best. To arrive at net income, I kept the net income/revenue ratio the same as it had been in the same quarter of the prior year. This captures some of the operating leverage and increasing returns to scale inherent in Facebook's business model.</p>\n<p>I estimated that the company would $9.5 plus $7.2 plus $11 plus $14.5 billion of net income this year, for a total of $42.2 billion. That's quite an improvement over last year's $29 billion!</p>\n<p>If these estimates are reasonable and we assume the company increases cash on the balance sheet to $75 billion, at the not-too-optimistic multiple of 25x earnings for a growing company and including the excess cash, that means Facebook stock could be meaningfully <b>undervalued at a market cap of $1,130 billion or $398/share</b>. Because of the growth we see, I really don't think it's unreasonable to arrive at <b>fair value with a 33x multiple on the stock for $1,461 billion or $526/share</b>.</p>\n<p><b>Global Growth and New Products add upside</b></p>\n<p>The estimates I used in the section above may be too low for two reasons. First, they're not accounting for the increasing returns on Facebook's growth outside the US. Facebook's growth inemerging markets such as Indiais extremely valuable because they have both a long runway for adding users, and the users themselves can be expected to become more profitable as GDP and consumption increase over time at rates faster than those in developed markets.</p>\n<p>Facebook is alsoexpanding rapidly into virtual reality. I don't have any way of estimating how big or how profitable this segment will be, but it's not unreasonable to think they'll have a lead in gaming and social segments and widespread adoption could lead to new kinds of unanticipated uses. For the last several years, spending on research and development has served to push the company's earnings down somewhat, but once they release a commercial product, we could begin to see the fruits of their labor.</p>\n<p><b>Conclusion</b></p>\n<p>With legal and regulatory challenges seeming less difficult and growing profitability, I am quite bullish on shares of Facebook. As always, a number of things could go wrong. If a new political environment becomes much more hostile to \"Big Tech\" or we see the emergence of a social movement to drop Facebook (I've tried to leave a few times myself!) that would depress earnings and change my thesis. At these prices and with this much growth on the horizon, I'm not concerned about those risks. As they say, \"we like the stock.\"</p>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Facebook Could Be A $500 Stock After Court Tosses FTC Case</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFacebook Could Be A $500 Stock After Court Tosses FTC Case\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-06-29 22:29 GMT+8 <a href=https://seekingalpha.com/article/4437058-facebook-500-stock-court-tosses-ftc-case><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nWins in court against the FTC and States clear up regulatory headwinds.\nSubstantial profits will grow throughout the year.\nFacebook may not have much to fear from future regulation either.\n\n...</p>\n\n<a href=\"https://seekingalpha.com/article/4437058-facebook-500-stock-court-tosses-ftc-case\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{},"source_url":"https://seekingalpha.com/article/4437058-facebook-500-stock-court-tosses-ftc-case","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1165468426","content_text":"Summary\n\nWins in court against the FTC and States clear up regulatory headwinds.\nSubstantial profits will grow throughout the year.\nFacebook may not have much to fear from future regulation either.\n\nnaruecha jenthaisong/Moment via Getty Images\nI started analyzing Facebook (FB) last week and I was surprised how bullish my conclusions were about the company's prospects. With yesterday's wins in federal court, some potential headwinds around litigation are clearing up. I'm now quite bullish on the stock and I think the stock price could be over $500/share by the end of the year.\nFacebook scores two wins in court\nFacebook scored a significant legal and regulatory victory yesterday with wins in two cases in which they were sued by the Federal Trade Commission (FTC) and a number of states. Not only are they near-term wins for the company, and but also for reasons I'll discuss in the next section I think they also bode well for the company's future regulatory prospects.\nIn the first case, the Federal Trade Commission (\"FTC\") claimed Facebook had gained monopoly power first through its acquisitions of Instagram and WhatsApp and second through making them inoperable with other platforms. The FTC sued for an injunction that would force Facebook to reverse or unwind the acquisitions and make them open their platform to other programs.\nThe court held for Facebook and against the Federal Trade Commission(\"FTC\") on two important items and against Facebook on one. First, the court held that the FTC did not show that Facebook had monopoly power in the field of personal social networking by showing that it had more than 60% market share in that field. Second, the court found the FTC waited too long to seek an injunction against the company. But third, the Court thought it might be possible for the FTC to replead its case seeking an injunction against Facebook for anti-competitive conduct under a different legal standard (see pages 50-53).\nIn the second case,the court held even more strongly in favor of Facebook and dismissed the states' claims. The states also sued claiming that Facebook was using monopoly power to keep competitors out and that acquiring Instagram and WhatsApp created a monopoly. The court dismissed both claims saying that first, the states had waited too long to bring their suits and that second, there was nothing illegal under current law to require Facebook to make its services interoperable.\nLegally, we can expect a few things. First the states will probably appeal the dismissal of their suit. I don't see this as a big issue. Parties lose lawsuits all the time and they appeal all the time without changing the result. What happens to the FTC suit is much more interesting.\nAs noted above, while the judge dismissed the states' case, he kept the FTC case open and only dismissed their complaint (the active piece of paper in the lawsuit). He basically invited them to re-file the case under the different law he cited. The FTC has a few strategic choices to make at this point. First, they can appeal the decision to a higher court. Second, they can re-plead the case in the way the judge left open for them. Third, they can start to look for another option to regulate the company (such as passing another law or creating an administrative rule). Fourth, they can start negotiating with Facebook. I surmise they'll work on each of the above.\nNormally, losing a case has an impact on what I would call the \"atmosphere\" or \"momentum\" around an issue above and beyond the impact of this ruling in particular. So in most cases I would expect a federal agency to feel somewhat embarrassed or humbled and that could have an effect on their decision-making going forward. In this case, with a clear opening to re-plead the case and start over, they may not be as \"gun shy\" as one might expect.\nTo the third point,there are already a number of members of Congress who wanted to regulate tech companies such as Facebook, and a number of them arereacting to the court decisionsaying that it shows the need for new legislation. The Biden administration'snew FTC chairwoman Lina Khan has a reputation as a tech critic, but I haven't found anything about a plan of hers to regulate Facebook. So all-in-all, there is certainly some desire for a change in law but I can't see anything in the works that could be put into place in the very near term.\nFourth, litigants are always negotiating and it's entirely possible that Facebook has offered some kind of concessions already that we don't know about. I don't see that as a likely outcome here.\nFuture Regulation Shouldn't Worry Facebook\nBased on experience watching regulations change in Washington and my reading of the political tea leaves, I want to explain why I'm not concerned that regulation will hamper Facebook's business prospects.\nFirst and foremost, while most people think of regulation as a system for the government to keep companies from doing things the companies want to do, it's just as true that regulation carves out a space for companies to do lots of other things without fear of adverse legal consequences. Moreover, the regulations can often entrench incumbents by making compliance too expensive or burdensome for new competitors. This was probably the case with thewell-publicized FTC settlement with Herbalife(HLF) whose share price has basically doubled since its settlement five years ago:\nSource: Seeking Alpha\nRegulation building a moat to keep out competitors and ensure profits is also probably a good description of what's happened to tobacco companies such as Philip Morris (PM) and Altria (MO). What would it take for someone to start a new cigarette company? Doesn't seem likely to happen anytime soon. A third reason regulation often doesn't end up hurting profits is the phenomenon ofregulatory capturein which the regulator ends up in effect working for the company! So all this is to say that even if regulation is coming, it may not necessarily be all that bad.\nSecond, one of the most likely outcomes sought in litigation is divestiture or interoperability of Instagram and WhatsApp - and that may be fine for Facebook. I use WhatsApp every day (it's much more popular outside the US), and I also have other competing programs such as Telegram and Viber on my phone. The other two services seem fine, but no one I know uses them on a regular basis. Moreover, no one I know who uses WhatsApp does so because of a link to Facebook right now. (Facebook would like to link them through Messenger, though). It's possible that WhatsApp has already won the competition by being first, better capitalized or executing better. So WhatsApp spinning off from Facebook just might not make a difference to the businesses. If Facebook is forced to make its service interoperable, they might still be able to charge other companies a fee for using their assets and this really might not be a bad business move. I'm less familiar with Instagram and its competitors such as Snapchat (SNAP), but I think a similar conclusion is likely.\nThird, even though there are good reasons to regulate Facebook around concerns about itseffects on users' mental health,political extremismandmonopoly poweramong other things, I just don't see much happening because of how politics works. (For an interesting views on Facebook and its effects on users and society, seeZucked by Roger McNamee). Politics normally ends up serving the interests of the wealthy and powerful, and Facebook, its executives and shareholders are now wealthy and powerful. Facebook has proven effective inlobbying and managing government relations, and it is increasing its focus on these. Facebook may also have powerful allies in Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and other tech companies which could be wary of further regulations. Right now, a number of the most powerful people in Congress such as Speaker of the House Nancy Pelosi basically represent Silicon Valley which bodes well for Facebook's interests. Even in the event that Republicans take over one or both houses of Congress in the midterms, I don't believe that the recent trend of \"populism\" among many Republicans will overcome the party's core resistance to regulation and support for corporate America.\nSo if I had to make a prediction, it would be that Facebook ends up making some kind of concessions that don't affect operations or profitability but allow politicians and regulators to claim that they've accomplished something. This has the added benefit for Facebook of making it less likely that further reform might come in the future.\nFacebook's Recent Earnings are great\nEven in the Covid-19 effected year of 2020, Facebook's numbers are outstanding and in the most recent quarter they're even stronger. As you can see from this summary of results included in the company's Form 10-K for 2020, earnings and margins are strong and growing:\nSource: Facebook\nRevenue grew by almost $15 billion in each of the previous 4 years, and net income climbed higher and higher for every year except 2019, when its move to $29 billion in 2020 made up for what it lost the year before.\nIf all we had to go on were these backwards looking numbers, I would estimate the \"back of the envelope\" value this company by taking multiplying the most recent earnings of $29 billion by 33 for $957 billion and adding excess cash of $62 billion for a market capitalization of $1,019 billion $359/share. Likewise, I would say that valuing it at only 25x last year's earnings plus excess cash yields a valuation of $787 billion, would mean the company was undervalued at a price $277/share. But for the reasons I'll set out below, I think these numbers are too low.\nEstimating this year's earning - much, much higher\nIn the first quarter of 2021, Facebook earned almost $9.5 billion as you can see from this income statement in the most recent Form 10-Q:\nSource: Facebook\nIt's clear that the first quarter of 2020 had a dramatic reduction in business activity from Covid-19. It would be tough to say how much that effected customers in the first quarter of last year, making a direct comparison very difficult. In order to get a good guess what the strong first quarter means for Facebook, I want to compare the company's user statistics to quarterly profits and make some educated guesses.\nFacebook's earnings presentations give us a description of the monthly active users of all the company's products broken down by quarter:\nSource: Facebook\nAs well as revenue:\nSource: Facebook\nand net income:\nSource: Facebook\nLooking over these three charts we see that even though monthly average users grow consistently, there is some seasonality to the revenue and earnings.\nI've made my own spreadsheet of this information:\nSource: Author\nIn light of those numbers showing:\n(1) MAU grows every quarter, but\n(2) Revenue and Net Income change with the seasons,\nI'm willing to make some rough guesses about the rest of this year:\nSource: Author\nTo arrive at these estimate, I kept user growth constant and multiplied revenue by 1.44, 1.4 and 1.3 over its prior year. That's a guess, but I think that having been transparent about how I made my estimates, you can adjust that number up or down as you think best. To arrive at net income, I kept the net income/revenue ratio the same as it had been in the same quarter of the prior year. This captures some of the operating leverage and increasing returns to scale inherent in Facebook's business model.\nI estimated that the company would $9.5 plus $7.2 plus $11 plus $14.5 billion of net income this year, for a total of $42.2 billion. That's quite an improvement over last year's $29 billion!\nIf these estimates are reasonable and we assume the company increases cash on the balance sheet to $75 billion, at the not-too-optimistic multiple of 25x earnings for a growing company and including the excess cash, that means Facebook stock could be meaningfully undervalued at a market cap of $1,130 billion or $398/share. Because of the growth we see, I really don't think it's unreasonable to arrive at fair value with a 33x multiple on the stock for $1,461 billion or $526/share.\nGlobal Growth and New Products add upside\nThe estimates I used in the section above may be too low for two reasons. First, they're not accounting for the increasing returns on Facebook's growth outside the US. Facebook's growth inemerging markets such as Indiais extremely valuable because they have both a long runway for adding users, and the users themselves can be expected to become more profitable as GDP and consumption increase over time at rates faster than those in developed markets.\nFacebook is alsoexpanding rapidly into virtual reality. I don't have any way of estimating how big or how profitable this segment will be, but it's not unreasonable to think they'll have a lead in gaming and social segments and widespread adoption could lead to new kinds of unanticipated uses. For the last several years, spending on research and development has served to push the company's earnings down somewhat, but once they release a commercial product, we could begin to see the fruits of their labor.\nConclusion\nWith legal and regulatory challenges seeming less difficult and growing profitability, I am quite bullish on shares of Facebook. As always, a number of things could go wrong. If a new political environment becomes much more hostile to \"Big Tech\" or we see the emergence of a social movement to drop Facebook (I've tried to leave a few times myself!) that would depress earnings and change my thesis. At these prices and with this much growth on the horizon, I'm not concerned about those risks. As they say, \"we like the stock.\"","news_type":1},"isVote":1,"tweetType":1,"viewCount":132,"authorTweetTopStatus":1,"verified":2,"comments":[],"imageCount":0,"langContent":"EN","totalScore":0}],"lives":[]}
