Why Facebook Is Worth $188 Despite Plummeting 25% This Quarter

Facebook’s (NASDAQ:FB) stock price dropped in late July after reports indicated that data analytics firm Cambridge Analytica harvested data of around 50 million profiles from Facebook, which resulted in massive backlash against the company. As a result, the company’s stock price fell from $217 to $176, wiping out over $100 billion in its market capitalization in a single day. More recently, the company reported a major hack that compromised data of over 50 million accounts. This has exacerbated the bad news for investors, and the company’s stock is fallen further to around $160 currently. Despite the current negative sentiment surrounding Facebook, we believe that the long-term growth opportunity is still a strong positive for the company, even as some younger users are getting off Facebook.

We believe that the company can continue to keep engagement levels high, especially on its biggest cash cow Instagram, and can remain the leader in the social media space. We have created an interactive valuation dashboard for Facebook, where we have summarized our expectations for the company’s full year results and the near-term valuation based on the expected results. If you disagree with our forecasts, you can change the key drivers – such as active users, average revenue per user (ARPU) and margins – for Facebook, and gauge how changes will impact its valuation.

Key Growth Metrics

Facebook’s global user base has expanded consistently in recent years, from over 1.6 billion at the end of 2015 to over 2.2 billion by the end of the most recent quarter. According to our estimates, Facebook’s massive user base will continue to see growth in international markets and complement the consistently increasing revenue per user. We forecast the total average users for 2018 to stand at 2.25 billion for the year, up from 2.05 billion in 2017. In addition, Facebook’s average revenue per user (ARPU) has surged from $11.20 in 2015 to $19.60 in 2017. While the growth rate could slow down due to a higher base factor and a small dip in monetization this year due to negative sentiment, we forecast the realized ARPU to stand at $22.60 for the year, which is a slightly conservative view compared to consensus estimates. As a result, we forecast Facebook’s net revenue to increase from $40.6 billion in 2017 to $51 billion in 2018.

In terms of geographies, it is important to note that Facebook’s U.S. and Canada ARPU ($82 for 2017) is significantly higher than other regions such as Europe ($27), Asia-Pacific ($8.70) and Rest of the World ($6.10). While the total revenues generated per user is significantly higher in North America, much of the future growth is expected to come from the Asia-Pacific and Rest of the World Segments. Similarly, significant user base growth is also expected from these regions. You can modify the interactive charts in the dashboard to gauge how individual changes in these growth drivers impact Facebook’s valuation.

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