PREPARED BY: Chris StanfordĀ 

DATE: 03/20/2020


In today’s challenging business environment, where companies face potential closures due to the impact of the coronavirus, it becomes important to consider the value of a company that is not heavily dependent on physical infrastructure. Businesses with physical operations encounter supply constraints and reduced consumer demand as people prioritize their safety overspending.

In this context, Facebook stands out as a company that has experienced fewer disruptions. While they do have hardware ventures like Oculus, the majority of their business is software-based, with ownership of Facebook, Instagram, and WhatsApp. Their revenue primarily comes from advertising on these platforms. Despite the widespread disruptions faced by many businesses, Facebook has remained relatively unaffected. Shouldn’t this type of resilient business be given a premium compared to others in the market? Even if unfortunate events occurred to its leadership, the Facebook platform would still continue.

However, there is a bearish case against Facebook. Investors fear that companies are reducing capital expenditures, including ad spend. While it’s true that ad spending may decline, it may not be as severe as some predict. With physical stores closed, companies are seeking e-commerce solutions and many small businesses, which previously had no online presence, are now compelled to advertise on platforms like Facebook.

The increase in ad spending from small businesses could offset the decline in Fortune 500 ad spend. Therefore, the impact on Facebook’s bottom line may not be as significant as expected, though a decrease in revenue growth rate is likely. However, it should be noted that Facebook’s situation may be more favorable compared to businesses heavily dependent on physical labor, storefronts, or hardware products.

Another factor to consider is Facebook’s strong balance sheet. With $133 billion in assets and only $30 billion in liabilities, Facebook has ample financial flexibility. This positions them to potentially acquire large tech companies at favorable valuations without needing substantial borrowing. If the world returns to normalcy within the next five months, it is reasonable to believe that Facebook could be worth at least $200 per share or more. However, it’s essential to recognize that predicting future performance is uncertain.

In conclusion, Facebook’s perceived undervaluation stems from its resilience in a challenging environment and its software-based business model. The potential increase in ad spending from small businesses, combined with a strong balance sheet, further contributes to the argument for its value. Nonetheless, conducting a thorough analysis and considering various factors is crucial before making investment decisions.



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