Facebook Inc (FB): What’s Behind the Meteoric Rise in Mobile Ads?

Valuing Facebook

I see only two drivers for Facebook Inc (NASDAQ:FB)’s revenue going forward. First, I expect that in-content advertising CPMs (cost per thousand impressions) will rise modestly as new advertisers take to the platform and ads become better targeted to the user.

Secondly, I expect that Facebook will continue growth in active users, which will drive increases in total advertising revenue.

Said another way, I think Facebook Inc (NASDAQ:FB)’s top line will grow only slightly faster than membership growth, since I don’t think Facebook will extract much more from each current user. Therefore, I think global user growth will be a good proxy for top-line revenue growth.

Total monthly active users around the globe rose 20.9% year over year, and growth hit 25% the year before. Ultimately, one can probably expect user growth to double in five years.

Therefore, in five years, holding all advertising revenue constant, Facebook Inc (NASDAQ:FB)’s revenue should come in at $3.2 billion a quarter, or $12.8 billion per year. Operating margins of 35% put pre-tax income at $4.48 billion, for post-tax profits of $2.9 billion.

At a fully-diluted 2.8 billion shares, Facebook is worth $95.2 billion, or 32.8 times my projected 2018 net income.

Facebook Inc (NASDAQ:FB) is, at best, fairly valued. A multiple of 33x 2018 income isn’t particularly high for a fast-growing firm that turns almost all net income into free cash flow. However, if we account for the risks of investing in social networks which go in and out of style year after year, the valuation is much too rich to compel my investment dollars into action. The margin of safety simply isn’t there.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and Yahoo!. The Motley Fool owns shares of Facebook and Google.

The article What’s Behind the Meteoric Rise in Mobile Ads? originally appeared on Fool.com.

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