Adjusted Valuations Indicate Facebook As A Superior Investment
Summary
- Using Adjusted Earnings and Assets, FB’s Adjusted Return on Assets was 43% in 2015 – roughly five times the traditional 9% ROA most financial databases report.
- This difference is primarily caused by FB’s $18.0bn goodwill, $4.8bn R&D investment, and $4.0bn excess cash, all of which significantly distort the firm’s economic reality.
- Also of note is the difference between the firm’s Adjusted Forward Value to Earnings ratio of 23.4x versus the firm’s traditional forward P/E of 27.9x.
- These low valuation levels relative to history, as well as the market’s overly bearish expectations, indicate that there may be equity upside potential for FB going forward.
Performance and Valuation Prime™ Chart
Under GAAP, the as-reported financial statements and financial ratios of FB do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of FB are primarily driven by the inclusion of the firm’s immense goodwill ($18.0bn) and excess cash ($4.0bn), which inflates its asset base, and by incorrectly expensing its R&D investments ($4.8bn).
After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates FB’s Adjusted Return on Assets (ROA’) as 43% in 2015. In contrast, most financial databases show a traditional ROA of only 9%. On the other hand, our analysis shows that FB has an Adjusted Forward P/E (V/E’) of 23.4x compared to the firm’s traditional forward P/E at 27.9x. The profitability of FB’s operations and its equity’s true value are therefore not what traditional metrics originally indicate.
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