Since the end of the Great Recession, growth stocks have shone brightly. Although value stocks have been the better ultra-long-term buy, historically low lending rates over the past 12 years have allowed growth stocks to aggressively borrow at cheap rates in order to hire, innovate, expand, and acquire. This probably won’t change anytime soon.
As you can imagine, Wall Street and investors have been willing to pay a pretty penny for this growth. Electric-vehicle manufacturers are valued at nosebleed valuations relative to their sales, while most cloud companies sport a multiple north of 20 relative to their forward-year sales.
But not all high-growth companies have sky-high valuations, at least in a relative sense. The following three companies all offer sustainable double-digit topline growth, yet are fundamentally cheaper than they’ve been in years (or perhaps ever). In other words, they’re growth stocks that also happen to be screaming value plays.
Social media kingpin Facebook (NASDAQ:FB) has faced a number of near-term challenges. The company generates 99% of its revenue from advertising, so the coronavirus disease 2019 (COVID-19) pandemic shutdowns weren’t good news. Further, it faced backlash during the summer over its ad- and content-vetting processes. Nevertheless, it continues to grow by a double-digit percentage, has multiple catalysts on the horizon, and looks cheaper than it’s ever been relative to its cash flow.
Facebook ended September with 2.74 billion people visiting its namesake website at least once each month. If you add unique visitors for its other owned assets, it had 3.21 billion family monthly active people in the third quarter. As the owner of four of the six most-visited social platforms on the planet (Facebook, WhatsApp, Facebook Messenger, and Instagram), there’s simply nowhere else advertisers can go to reach a broader or more targeted audience. These user statistics are what drive double-digit revenue growth and the company’s unsurpassed ad-pricing power.
We’re also talking about a company that hasn’t come close to fully monetizing its assets yet. The approximately $84 billion in sales that Facebook is expected to have generated in 2020 is almost entirely derived from ads on Facebook and Instagram. WhatsApp and Facebook Messenger haven’t been monetized in any meaningful way yet.
Facebook is almost certain to expand its revenue streams beyond advertising. It’s expected to launch its own cryptocurrency (Libra) sometime in 2021, still has fintech aspirations with Facebook Pay, and might one day become a preferred content streaming provider.
The point is, Facebook is currently trading at a little north of 21 times its cash flow, which is just a hair below its five-year average multiple of almost 23 times cash flow. By 2024, Facebook’s cash flow per share will have more than doubled from 2020, placing it at a multiple of about 11 times cash flow. That would be historically low. That’s why Facebook represents a screaming value in the tech space.
Speaking of tech stocks that represent a screaming value, cloud-based customer relationship management (CRM) software provider salesforce.com (NYSE:CRM) also makes the list. Salesforce is closing in on a 25% retracement after hitting an all-time high at the beginning of September.
Full story on Fool.com
Leave a Comment