What will Facebook revenue be in 2027?

I'm beginning to think that my previous estimate for FB earnings growth was too low.  Here's what I said back in July:

My estimate of Facebook's future EPS growth is:
Years 1 & 2: 50%; Year 3: 30%;Years 4 & 5: 20%; Thereafter 15%.

Now 1.5 ^ 2 * 1.3 * 1.2 ^ 2 * 1.15 ^ 5 equals 8.47, so I was projecting that Facebook earnings will be 8.5 times current earnings in 10 years.  How did I come up with this estimate?  Well the initial 50% is its current growth rate, but years 2 - 10 is really just a wild guess.  Let's try and be more methodical.

Here's what could reasonably happen in 10 years:

• Number of people connected to internet grows from 3.7B to 6.3B = 70%
• Average income of existing users grows by 50%
• Amount of time on internet spent by average user grows 100%
• Number of ads served to an average user per hour of internet time grows 30%
• Effectiveness of an average Facebook ad grows 160% (ie. 10% per year)

Now 1.7 * 1.5 * 2 * 1.3 * 2.6 equals 17.24, so it's possible that Facebook's revenue will grow 17 times in the next decade.  Facebook's expenses do not need to grow in line with revenue - it will not need 17 times as many employees and data centres - so its profit could grow substantially faster.  

Such a behemoth would likely have it's wings clipped by regulation, but I'm still very happy to have a large share of my net worth in Facebook (and Google, for the same reasons).

Liquidated HOG, Bought more FB

Yesterday I sold all my 7,156 shares in Harley Davidson for $46.93 each, total $335,831 (£253,015).  My reason for selling is that in the long term HOG faces a headwind in the form of battery technology and self-driving cars.  In 15-20 years most people will not buy cars and instead be driven around in a self-driving taxi.  Some people buy Harleys because they enjoy riding and want to be seen riding, but others will give up their Harley for a robot-chauffeured commute to work.  In addition, in 30-40 years it's conceivable that petrol-engined vehicles will be banned in some large countries (although probably not USA).

Yesterday I also purchased an additional 1,680 shares in Facebook at $179.61 each - total $301,744.80 (£227,455).  See previous post for reasons.

Why I Bought Facebook

I just bought 580 shares in FB for an average of $172.56 each.  Here's why:

Strength of Competitive Moat 10/10
Level of Debt 10/10
Quality of Management 9/10
Price 8/10

Competitive Moat

Facebook has enormous network effects - people join the social network that their friends and family are on, and *everyone* is on Facebook to some degree.  And after the age of 25 people don't change their habits much - Facebook is *sticky*. This moat has protected it against front-on assaults like Google Plus and is likely to still be effective in 20 years.

Plenty of Cash

Facebook has about $35 billion in cash. It would be nice if it could be paid out as dividends, but with current US tax law and Facebook's need to acquire competitors, I'm not counting on it.

Good Management

Management seems pretty good - Mark Zuckerberg and Cheryl Sandberg are smart and focused on the right things.  Facebook overpaid for WhatsApp but vastly underpaid for Instagram.  (Seems that Instagram is now Facebook for girls aged 12-25).  Facebook/Instagram has successfully fought off a Snapchat assault.

Good Price

Current EPS is $4.61 so price/earnings ratio is 37.5.  My estimate of Facebook's future EPS growth is:
Years 1 & 2: 50%; Year 3: 30%;Years 4 & 5: 20%; Thereafter 15%.  That would mean EPS in 10 years is around $39.  Assuming P/E of 20 at Year 10 that gives a price of 780, ie. an annual return of 16.3% per annum.  Not bad.

Anecdotal Evidence

1. In Myanmar, Facebook is the internet.
2. Seems Facebook is beating Google at their own game: "Facebook has really improved their ad platform. They offer pretty much unparalleled user targeting features, coupled with some clever tools like product ads that are much easier to use and integrate than Google's."
3. I'm thinking about buying a Macbook Pro, and have come close to pulling the trigger a few times over the past 6 months.  So close that I've put it in the shopping cart on Apple's website.  Yet I haven't seen a single Apple ad on Facebook, Youtube or Twitter.  So there is clearly plenty of room boost ad revenues for targeted online ads.
4. India is growing nicely for Facebook - in total users and revenue per user.

Sold Goldman Sachs

After re-thinking my tolerance for risk, I decided to sell all 710 GS shares for $89.33 each to reduce the margin loan.

More Wells Fargo

Just bought another 3,000 WFC at $9.78 each. At the same time I have added £20,000 to my investment fund, half of which (approx $14,000) I transferred to my US margin account to improve the margin equity percentage.

Couldn't Resist Wells Fargo

I have a simple rule when it comes to investing: If you can buy a stock for two-thirds the price Warren Buffet paid, do it.

Today I bought 1,875 Wells Fargo shares (WFC) for $16.15 after I finally did a bit of research and discovered Warren Buffett thought this stock was a excellent value in the low 20's. Add the fact that "we've added quite a bit to our holdings since the start of the year [2008]" and you can see that The Oracle thinks this is a great stock to buy at around $25.

Which makes $16 a screaming bargain.

To top it off, Buffett's praise for Wells Fargo was extroadinary: "There's no banking institution, during the last six months, that has done a better job for its holders, for its depositors, and for its borrowers, than Wells." That's good enough for me!

To fund this stock I've put another £20,000 into my investment fund. But since the value of the pound is painfully low, I only converted half that to dollars (around $14,000). The remainder of the WFC purchase was funded by my margin loan.

A Little Housekeeping

Last Friday I converted £10,000 to US$15,200 to pay off a little of the margin loan. At the same time I have had to withdraw about £80,000 from my fund for personal reasons.

Here are the prices of the stocks I hold at today's close:

GS: $78.99
GOOG: $292.96
HOG: $17.01