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Strategies & Market Trends : Value Investing
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To: Spekulatius who wrote (61141)7/30/2018 4:42:54 PM
From: Graham Osborn  Read Replies (1) of 78714
 
As you noted, the critical question in Facebook's valuation (leaving aside the question of options and RSU issuance) is ARPUs. MAU growth will obviously slow down. If we assumed recent ARPU growth continued for the next 10 years then the revenue growth rate could be 30%+ (that would assume ARPU of $80 per user in 2027). That would justify the current valuation. Conversely if ARPU leveled off gradually a 20% revenue CAGR would be much more realistic. That would put fair value closer to 20 times free cash flow according to the method I use.

Then there are obviously various less optimistic scenarios in which user growth slows faster than expected, or ARPU levels off or even declines.

One of the things I learned from Buffett is if you go in assuming a company can growth at 20%+ for the next 10 years, in most cases you are going to be disappointed. And if you look back historically at the (large) businesses that did achieve that, almost all of them were available at some point or another for less than 20 times free cash flow.

As I noted before, I have yet to identify a situation where Buffett paid more than 20 times free cash flow for a stock. And in most cases he paid less than 15 times. If you are putting 10-20% of your portfolio in a company - as both he and I have periodically done - you need a large margin of safety. Assuming that criterion is met, the appropriate multiple depends on the 10-year sustainable growth rate. Buffett has often bought lousy businesses, but he has rarely overpaid for a wonderful business.
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