Get 40% Off
🚨 Volatile Markets? Find Hidden Gems for Serious OutperformanceFind Stocks Now

Facebook Inc: Discounted Cash Flow Valuation (DCF)

Published 05/25/2018, 06:00 PM
Updated 02/16/2024, 09:23 AM

Company Description


Facebook Inc (NASDAQ:FB). is focused on building products that enable people to connect and share through mobile devices, personal computers and other surfaces. The Company's products include Facebook, Instagram, Messenger, WhatsApp and Oculus.

Discounted Cash Flow (DCF)


The DCF valuation of Facebook will be based on a model I created. For reasons of space, I will not explain in detail the calculation of each input of the model.

Starting data of the model:

data
In the image is shown the screen of the model where all the accounting data are collected, and not, of the company. (data in billions of dollars)

STEP 1: Discount rates (updated data to 05/24/2018)

WACC

STEP 2: Adjusted EBIT*(1-t) (adjusted for capitalization of research and development costs)

STEP 3: Reinvestment rate and Free Cash Flow To The Firm (FCFF)


The average reinvestment rate of the last 3 years is used to determine the FCFF.

STEP 4: EBIT after taxes growth rate


The growth rate is determined as the company reinvests (reinvestment rate) and the quality of reinvestments (ROIC). (assuming that ROIC remains stable over the next few years)
Expected growth rate

STEP 5: Two Stage Growth Model (high growth (5 years) + stable growth)

When an enterprise moves from a phase of high growth to a stable growth phase, it is necessary to attribute to it the characteristics of mature enterprises with stable growth:

    • -Cost of equity.The beta is taken from the value of 0,86 to 1.
    • -Excess returns. We hypothesize a lack of excess returns during the stable growth phase, thus setting the return on invested capital (ROIC) at a value equal to that of the cost of capital (WACC).
    • -Reinvestment rate. Businesses in a stable growth phase tend to reinvest less than those in the high growth phase, so we can express the reinvestment rate, in the stable growth phase, as the ratio between the stable growth rate and the ROIC that the company can support in the phase of stable growth.
    • -Stable growth rate. Since no company can grow to infinity at a rate higher than the general growth rate of the economy, we establish the perpetual growth rate in the phase of stable growth equal to risk-free rate of 2,983%.
3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .




STEP 6: Equity value



CONCLUSIONS:


Facebook shows a 13,47% potential, starting from the closing price of 05/24/2018.

EXTRA:


Facebook has closed the fiscal year 2017 in the month of December. Therefore, for these calculations, "old" data of six months were used. Making some hypotheses, it is possible to repeat the procedure to take into account the past three months (one quarter), using the EBIT TTM (sum of the last four quarters) net of taxes.

DATA:

We use the estimates made previously relating to the WACC, reinvestment rate, ROIC and expected growth rate of EBIT after tax.

Adjusted EBIT*(1-t) it was calculated in the second image.


Disclosure: The information contained in this article represents my personal analysis / opinion and does not contain a recommendation for an investment or a particular stock.

Latest comments

Hello,  Please is possible to get the spreadsheet? thank you
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.