The FANG stocks (
This note’s objective is to analyze the FANG’s and Apple’s free cash flows, net cash position and valuations. It will also touch on revenue growth rates since this is one of the reasons that the FANG’s shares are trading at valuations much higher than the market.
While EPS and PE multiples are the most widely used valuation metrics by investors I believe it is very worthwhile to use cash flows as another investing tool. I have built my models to take operating cash flows and subtract capital expenditures, acquisition of items such as intangible assets and acquisitions to calculate free cash flow.
I believe acquisitions should be taken into account since this is another form of Research & Development. I also have calculations including dividends and stock buybacks to understand how a company’s cash is being spent. Cash flows can be very different year to year (and especially quarter to quarter which makes this analysis almost irrelevant) as management can decide to lengthen payables or pay them off early if they get a good discount from their vendor. It is best to look at cash flows over at least a two year period and in reality three years. This is more challenging for higher growth companies but if there is a trend it can be helpful.
Facebook expensive but executing well
Facebook reported December quarter revenue of $5.84 billion, an increase of 52% year over year and 60% when adjusted for the stronger dollar. The 60% growth was the highest rate since the June 2014 quarter. Additionally its advertising revenue grew an estimated 66% year over year adjusted for currency and was significantly ahead of estimates. This has led analysts to raise their revenue and EPS projections.
Facebook has been able to more than double its operating cash flow over the past two years to $8.6 billion in 2015. After capital expenditures and a small amount for acquisitions it generated $5.76 billion in free cash flow or $2.02 per share. This makes its stock price to free cash flow per share multiple 52x compared to the Street’s 2015 PE multiple of 45.6x. Based on the Street’s 2016 EPS estimate of $3.14 (38% growth from 2015) the share’s have a 33.1x PE multiple. While expensive the company is executing above expectations and can support valuation metrics above the S&P 500 and probably the NASDAQ.
Facebook has $18.4 billion in net cash or 6% of its market cap so not much excess there given the company’s growth rate and habit of buying companies.
Amazon’s valuation lower on cash flows vs. traditional PE’s
Amazon generated $35.7 billion in revenue for the December quarter, a reported 22% increase and 26% in constant currency. The Street uses Amazon’s GAAP results to value the share’s, which makes them look VERY expensive. This isn’t to say they don’t have a high valuation but in looking at its cash flows it looks better for the company.
For 2015 Amazon’s GAAP EPS was $1.25, which would make its PE multiple 402x. I have seen sell-side models with adjusted 2015 EPS ranging from $3.15 at RBC to $4.96 at UBS to $5.72 at Evercore ISI. I have it modeled at $5.76 when you remove stock-based compensation expense. Even at my $5.76 the shares have an 87x PE multiple. On the Street’s 2016 EPS estimate of $4.61 it is trading at a 109x PE multiple. If the company’s stock based compensation has a similar impact this year its non-GAAP EPS should be around $10 making its PE multiple 50x.
Amazon has also more than doubled its operating cash flow over the past two years to $11.9 billion in 2015. Its free cash flow has increased almost 4x to $13.76 per share which makes its free cash flow multiple 36.5x which looks at least more reasonable especially given its growth rate.
The company has a net cash position of $11.6 billion, which is 5% of its market cap so no excess cash at this company.
Netflix looks like it will raise capital to fund its growth
Netflix reported December quarter revenue of $1.8 billion, up 23% year over year and 30% when adjusted for currency. The domestic streaming revenue was slightly better than expected even with softer subscriber additions while international streaming revenue was a bit light partly due to the stronger dollar. It appears that the US market is maturing while the International business has a long ramp given the company’s large geographic expansion in January.
The company’s 2015 GAAP EPS was $0.28 for a PE multiple of 296x while its non-GAAP EPS of $0.57 per Evercore ISI helps make the PE ratio 145x. It looks even worse on a free cash flow basis since it has had negative cash flows for the past three years and based on the company’s strategy of investing in original, particularly owned content, more cash is required upfront to develop it.
Yes no one is buying or holding Netflix stock based on pretty much any valuation metric. Investors are “Betting on the Come” that it will dominate the worldwide streaming business. Beware that Netflix is signaling that it will need to raise additional funding either later this year or early 2017, per Ken Sena at Evercore ISI, and it already has a negative cash balance.
Google/Alphabet growing well
Alphabet generated $17.1 billion in its December quarter after removing $4.1 billion in Traffic Acquisition Costs (TAC). This was a reported increase of 18.3% year over year and 25.2% in constant currency.
By breaking out its Other Bets businesses (even though their losses almost doubled to $3.1 billion for all of 2015) to enhance the company's transparency along with revenue acceleration and core margin expansion the company overall had a good quarter. Alphabet generated $29.50 in EPS for 2015 so it’s shares are trading at a trailing 23.9x PE multiple. Based on the Street’s $34.50 EPS projection its PE multiple falls to 20.4x.
Alphabet doubled its free cash flow over the past two years to $15.9 billion in 2015. This is $22.91 per share, which makes it free cash flow multiple 31x. The company does have almost $68 billion in net cash or 14% of its market cap.
Apple has much lower growth but throws off a lot of cash
Apple will stand out from these companies based on its much lower revenue growth but much lower valuations and higher cash balance. It generated $75.9 billion in revenue for the December quarter, up a reported 1.7% and 8.4% in constant currency.
In fiscal 2015 it generated $9.63 in EPS which means its shares are trading at a 9.8x PE multiple and based on the Street’s 2016 EPS estimate of $9.08 they are at a 10.3x multiple. Apple generates more cash flow than net profit so based on its fiscal 2015 free cash flow of $11.99 per share it has a 7.8x multiple. (Note that I include capital expenditures, intangible assets and acquisitions in this calculation but not dividend payments).
The company has increased its free cash flow by 77% over the past two years and with $155 billion in net cash as of the end of the December quarter this represents 30% of its market cap (before any additional taxes would have to be paid if brought back to the US). Of all the stocks in this group it isn’t the sexiest but should hold up much better if investors decide to lower the PE multiple assumptions for the higher multiple shares.
