Facebook Intrinsic Value Calculation (FB Stock)

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Disclaimer (Investing with Tom):
I am not a financial adviser. This video is for education and entertainment purposes only. Seek professional help before making any investment decision.
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This video is sponsored by Hatch. The views and opinions expressed in this video are the creator’s own and not necessarily the views or opinions of Hatch. This is not financial advice.

[@InvestingwithTom]

Get $20NZD when you deposit $100NZD with Hatch: hatch.as/InvestingWithTom Also, spreadsheet download is in the description 🙂

[@maltlickytexas]

Very good analysis, thanks! Can you do a similar intrinsic value analysis for Illumina (ticker: ILMN)?

[@camilomoises2032]

instaBlaster

[@rc5049]

Great video I literally did a valuation on fb yesterday and its good to hear some else comparisons and reasoning.

[@InvestingwithTom]

great minds ;)

[@rajibear77]

When you input the free cash flow are you taking into account to seperate capex into maintenance and other capex. I think the correct free cash flow calculation is ' net cash from operations' - 'maintenance capex'. Monies that are reinvested to grow the business should be excluded?

[@KelechIwuaba]

Thanks for breaking this down. Helps to make it easier to understand valuation. But I need to learn more on how to determine that growth number for the 1-10 years in the future

[@InvestingwithTom]

It's all a bit of an educated guess really, but it's an important variable

[@blackathena1565]

This was a great starting video and thank you so much for the calculator! It was so much easier to follow along than trying to build it while the video was playing.

[@InvestingwithTom]

Happy to help!

[@navinbkk]

Excellent !! . well presented and well explained ... couldn't be easier than this .. and thanks for allowing us to download the spreadsheet too... thanks again mate... your videos rock !!

[@InvestingwithTom]

Thank you! I appreciate it a lot

[@luisbarahona3773]

Hey Tom, please do a sequel to this video as a lot has occurred since then.

[@k-way6002]

would you be able to do this in a shorter term basis?

[@InvestingwithTom]

I’m afraid long term value predictions are tricky enough! Short term investing is not the game I play 🙂

[@Jai-AnnaSamlal]

Any tips on how to handle negative numbers? Such as a negative free cash flow

[@omoba5467]

Great Video. Anyone disliking this video, bought Facebook without margin of safety.

[@InvestingwithTom]

Or maybe they were too slow in March like me 😅

[@MrShpitZer]

What terminal value means? and how do i determine which number to put in?

[@pitchitbusinesschannel]

Thanks for the great video. Question: how do I calculate Present Value?

[@lucnorris9007]

wondering this too

[@ToyotaTuned]

Hey man i cant seem to get the PV formulas based off the dropbox link. What are the formulas? thanks

[@jamesoconnor802]

Hi Tom. Thanks for the video. I'm trying to get my head around intrinsic value calculations. Is this Monish Pabrai method? Would you recommend this method instead of Phil Towns method? Cheers

[@TippsTrickMore]

Correct me if I'm wrong, but the calculated 50% Margin of Safety gives you an estimation when to buy a stock right? When do you sell it?

[@EarnMoreSpendLessInvesttheRest]

@playforfun, don't sell unless the stock shoots up far above your intrinsic value (I use 20% above) and you are offered a price you can't refuse. Before you sell, re-run the valuation with updated numbers to confirm if the intrinsic value has changed. Hope that helps.

[@junkyard3000]

Awesome video! Extremely informative and providing the spreadsheet is super helpful. Great work, mate!

[@InvestingwithTom]

Happy to help!

[@JackDespero]

I have a question. When calculating the depreciation, why do you divide instead of multipliying by 1-discount rate? In summary, you do 1/(1.1)^x instead of 0.9^x, which are not the same. A discount rate is just a negative compound rate and it should be calculated as such, in my opinion.

[@KevinPetersdp]

On the spreadsheet in the description, The 1 Year free cash flow, how do you change it to millions instead of billions?

[@JeremiahCarter]

So if it was 500 million you would input “.5”. And if it was 750 million it would be .75:) and it it was smaller like 55 million it would be “.055”...

[@robmilan7432]

Tom thanks for this video. I got a doubt about the 10% discount rate that you applied to actualize the future cash flows. Why are you using such an high discount rate of 10%?! According with principles this should be the rate of a relatively risk free investment like treasury bonds rate. But today this rates are extremely low....so I really do not understand the rational of applying such a big percentage. Could you please explain the rational? If you apply a more realistic rate like 4%-5% the valuation result increases a lot making Facebook not such a bad investment option..

[@InvestingwithTom]

Thanks for the question! The short answer is I'm just copying Mohnish Pabrai. The longer answer if that I want to compare it against my alternatives. A rough long run avg. return from stocks generally is ball-park around 10%, so I wouldn't be particularly attracted to taking individual company risk unless it returned at least that to me over the life of the investment. I can certainly see the argument that with interest rates so low you could use a lower discount rate, however rates can come back up (eventually) so this is how I prefer to normalise everything. There should certainly be some premium above the risk free rate at least, but exactly where you land I think you'll find many different opinions. Hope that helps :)

[@robmilan7432]

@@InvestingwithTom Yes now it’s more clear thank you Tom! Such a pity that there is not a subscriptions investing tool that make such a calculation authomatically for all the stocks so that you can filter for the most undervalued. Isn’t that incredible after all the books that have been written about value investing?!

[@alvinkoshy]

Thanks Tom. What is the phil town site you where referring to. Can you make a video how it helps in analysing and picking stocka

[@salahouah3749]

hi nice job but what if the statistics shows a negative numbers such as the growth rate or the net cash? thanks again

[@InvestingwithTom]

Check out my intrinsic value FAQ video 🙂

[@rhupeshganesh]

Hi Tom.. I follow all your videos and appreciate the great works you do. One question. When you calculated Net Cash why did you just subtract debt? Instead, should we subtract total liabilities? Thoughts?

[@LearnEarnInvest]

Hi Rhupesh, Just wanted to reach out about this comment. Total Liabilities have a lot of things baked into them just like Total Assets. What Tom is doing here with the Net Cash / (Net Debt) is accounting for the straight cash or straight debt. It gives valuations a simple adjustment up (for cash) or a simple adjustment down (for debt).

[@ilbianche247]

Hi Tom, Thanks for the video, but i don't understand where does ti come from the Terminal Value ? why 15 or anything else... thanks in advanced

[@jorgeb2078]

Hello! I have a question to you. I don't understand why are you establishing a margin of safety of 30% and 50%, respectively? As I can read previously, Benjamin Graham and Warren Buffet have always been defended that a margin of safety about 15% is well enough to accurately calculate the intrinsec value of a stock company. Can you give me some clue about that? Thanks, I like your youtube videos so much :D

[@alessandrodandrea6615]

Hey Tom, excellent video, just a quick question, how can I change the spreadsheet in million?

[@davidquintero7903]

Nice video and big thanks for sharing! - Quick question, why is your FCF on period 1 = 21 and you still calculate a PV from it? shouldn't actually be this our period "0" and therefore this has no changes/discounts to present? Period 0 = 21; PV = 21 Period 1 = 25; PV = 23 ... Thanks in advance for you answers!

[@filippopasini4665]

Only a small question ? have u considered the future buyback of shares in the valuation ?

[@InvestingwithTom]

Not directly. This is cash produced regardless of dividend or buyback policy. How it gets distributed is important but not something that tend to be included in these valuations

[@JackDuffley]

Nice, succinct explanation of present value and the time value of money!

[@InvestingwithTom]

Thanks mate!

[@trueblueinvestor1826]

Love ya work Tom 👌

[@ilhadourada]

Fantastic, I really appreciate the excel file! Thank you Tom!

[@santiagotaboada4584]

Hello, I have a quick question, how do I use your chart if the numbers for free cash flow or shares outstanding millions and not billions, like your Facebook example? Thank you for the amazing resource by the way!

[@jacksimpson2464]

Hi Tom, I've been looking for a way to calculate the intrinsic value of a company for quite a while now and hit the jackpot when I came across your method and the included spreadsheet. I have one problem though, I am from Australia and when using the formula/spreadsheet on Australian stocks it is blowing the intrinsic value sky high. For example JB Hifi - JBH is currently trading at roughly $45 and the intrinsic value is showing $145 when using the spreadsheet provided. Any insight in to why this may be would be greatly appreciated mate. Thanks mate

[@jakegard1495]

I find it very interesting that in Q2 Li Lu bought FB at above the MOS

[@jakegard1495]

Great video as always Tom!

[@InvestingwithTom]

thanks! He's much smarter than me ;)

[@stefanflowers4192]

Why use net cash as opposed to net assets? Wouldn't their assets apart from cash contribute to their buisness/intrinsic value?

[@espositojp]

I realize that Yahoo Finance Growth Estimates are indeed only an estimate, but I'm curious if this is supposed to be an estimate of EPS or Net Income Growth or top line revenue growth? The reason I'm asking is when trying to do DCF models for other companies like BRK.B, Yahoo Finance is projecting 23.3% Growth in the next 5 years, but when you review Morningstar data they have a 10 year historic growth of Revenue being 11.27% and EPS and Net Income growth being more similar at 25-26%. Any help from any of you would be greatly appreciated! Thanks for the great KZbin channel Tom!

[@InvestingwithTom]

I believe they're earnings growth numbers but I could be wrong. Definitely adjust it as you see fit based off of your research though. For BRK that's almost certainly too high. Earnings could grow that much, but that's only because they now have to include unrealised investment gains/losses as earnings

[@andre6228]

Where I can find the graphic from minute 3:43 ?

[@InvestingwithTom]

Check out the spreadsheet link in the description 🙂

[@andre6228]

@@InvestingwithTom I saw that is on the excel file, but I'm asking how to create or where I can find it. Let me ask you why do you choose a 10% Discount Rate and a Terminal Value of 15. Thank you in advance! :)

[@InvestingwithTom]

@@andre6228 I think the formulas should be in there. Check out my intrinsic value updated and intrinsic value FAQ videos for all the info 🙂

[@manzeelp]

Hey Tom, great video, thanks for sharing. How would this formula work for a company with negative EPS?

[@Lucianoprx]

You are simply awesome, man! Enjoying your channel a lot.

[@InvestingwithTom]

Thank you!

[@luigibeccali2840]

hello, i have a question, why using 15 as a multiple if FB's average price/FCF is around 30? thank you!

[@karinalopezhuitron6003]

For the terminal value can I use de EV/EBITDA from the technology sector?

[@mikehollowayuk]

I literally love you Tom. 😎😎

[@samiratanjin5586]

Hi Tom, Thanks for the real great video and template.One question though- in case of 3 years calculation (investment period =3years) do i only consider the 1-5yrs growth rate and add 1+2+3 years PV. Is there anything i missed? thanks

[@DirkKunert]

Hello Tom, Thanks a lot for this video! (1) You say that the number of outstanding shares was 2.4 B at the time you recorded this. When I divide the market cap by the stock price (both shown at the yahoo page), I get 811.31 B$ / 282.54$ = 2.87 B. Which number of shares is correct? (2) The value of cell B8, 21.2 B$, is the Free Cash Flow of year 2019. Shouldn’t cell A8 not contain “Last year’s Free Cash Flow” or “Free Cash Flow in 2019”? (3) As in year 2020 there is growth already, shouldn’t cell D4 not contain the B8*(1+B4)? Kind regards Dirk

[@tttmsu]

Good job on the valuation. I ended up on almost the same numbers.

[@InvestingwithTom]

Nice work

[@roys3047]

Hey Tom! Can i know what is terminal value and how do you get the values

[@LearnEarnInvest]

Hey Roys, Tom goes over Terminal Value as being the multiple you could sell the business for after holding it for 10 years. IE. The business is growing FCF for 10 years, the final year you sell the business and are able to sell it for 15 multiplied by the Year 10 Cash Flow. Hope that helps!

[@allankanaiya3775]

what if one yahoo finance we get a negative number but in the the rule one toolbox we get a positive number? This is on GE btw.

[@ES-yc1tp]

Now I just gotta wait for another market crash to buy Facebook! 😋 Thanks for your content, it is very informative. I'm new to your channel, do you ever share your portfolio?

[@InvestingwithTom]

Have mentioned stocks here and there but haven’t shared the full portfolio

[@chrisbuckley3403]

Can you do a Vid for the intrinsic value of a bank. Cheers

[@mato73]

Hello Tom, Thank you for the video. Is Net Cash/(Net Debt) calculating right? It seems you just subtract it instead.

[@InvestingwithTom]

I add it to the present value of future cash flows :)

[@mato73]

@@InvestingwithTom Thank you! Now I see how you did it. I was just confused because excel sheet was described differently than on the video. First I thought that Net Cash is divided by Net Debt.

[@miguelvargas4638]

What kind of work do you do to expect a grow of 10% for the last 5 year of your analysis? Why not 12% or 15%?

[@biglebowsky1988]

how do I change the spreadsheet to be in million?

[@clarkeholland5270]

It dosen't matter, if you use all figures in millions then it's correct. If the figures in B8, B9 and B11 are ALL billions then it works. Just don't mix millions and billions. Add 3 zeros or take them off (move decimal point 3 places) if using different websites (eg I use Stockopedia and they only do millions, but the microtrends will use billions if it can)

[@darshansimha2166]

Loved the video Tom, found it to be very informative and useful. I understand the intrinsic value of the stock, but I am trained to look at the PE before investing, is there a correlation to PE and the intrinsic value if so how do you make a decision to buy a stock considering both the intrinsic value and the PE?

[@InvestingwithTom]

Intrinsic value in the best approach IMO. A low PE stock might actually be expensive is the earnings part of P/E is declining, and alternatively a high P/E stock might be a great deal if it’s growing earnings very fast

[@navinbkk]

Tom, how would you value Financial Sector Companies such as Banks, etc.. that generally have negative FCF YOY ...how can you use the same method as explained in this video ? Can you please make a video explaining the same for the financial sector also... ..Thanks..

[@nathwak]

can you do one for BMY?

[@jogomartins760]

I try to do the same with microsoft and apple with this and can´t get a real value.

[@arsalaanali6380]

Great video! Interesting you have included 30% margin of safety now, whereas previously only included 50%? Are you finally coming round to growth at a reasonable price idea?

[@InvestingwithTom]

I think I've always been open to that! Growth is factored into all of my valuations. I'm more comfortable with a smaller MOS if I'm more confident in my growth projections

[@arsalaanali6380]

@@InvestingwithTom Have you ever sold anything at a loss, ie realised a loss? Or too stubborn

[@InvestingwithTom]

@@arsalaanali6380 yup, FCAU

[@arsalaanali6380]

@@InvestingwithTom Now since Tesla is profitable and free cash flow positive, are we going to see a Tesla Valuation?!

[@InvestingwithTom]

@@arsalaanali6380 haha Tesla is too hard basket for me 😂

[@zmulburr]

Hey Thanks for the help :). How do you use this calculation if the business has higher debt than cash? for example 2b cash and 7b debt. Do you then have to use -5 or 5 within the calculator? thank you in advance

[@InvestingwithTom]

Yes, you would use a negative number. This is fairly common with a lot of companies

[@maniaclel8736]

Hello guys im confused so if lets say the intrisic value of a value of a company is 100 billion dollars does that mean that based on the growth rate of the company and the discount rate the company will be worth 100 billion dollars today. So buying a stock of a company whose current valuation is 100 billion dollars is basically saying i wont earn anything cause the amount of what i earn fron the stock will be worth the same in "today's money" I

[@InvestingwithTom]

Assuming you're exactly right on all of your inputs, your return would be the discount rate % (if you purchased at exactly intrinsic value) :)

[@maniaclel8736]

@@InvestingwithTom alright thanks Tom appreciate it I am a young Investor here so this theory is new to me haahhahaa

[@maniaclel8736]

@@InvestingwithTom sorry if let's say my discount rate 10 percent it's annually 10 percent right

[@InvestingwithTom]

@@maniaclel8736 yup, exactly

[@leonardalbert9262]

Why do your ways of calculating the intrinsic value always change in some way?

[@junkyard3000]

The first video he did on Apple's intrinsic value uses Phil Town's "Rule One" which is based on EPS and PE ratio. That method does not factor in cash, debt, or free cash flow. The next video he did on Apple/Ford use Mohnish Pabrai's Discounted Cashflow model which takes into account free cash flow and excess capital (cash). This technique did not account for debt so Tom modified it to come up with a valuation against Enterprise value instead of market cap. This video is what I would consider a blend. It's still using Pabrai's Discounted Cashflow model. But rather than making the final determination based on market cap or enterprise value, Tom brings in the number of outstanding shares so he can normalize to a price per share. This video also explicitly factors in margin of safety into the spreadsheet. A good follow up question would be on the pro's/con's of using the Discounted Cash flow model described here vs the Phil Town "Rule One" technique (from the first Apple Intrinsic value video) and when to use which one.

[@duaneharrison3960]

Hi Tom, how does growth rate work with companies that have minus growth or very little at the moment because of coronavirus, for example airlines? Would love to have a video on the Intrinsic Value of an Airline!

[@InvestingwithTom]

Same process although you may need to override each years cash flow manually based on your estimates rather than using a growth rate

[@caseyzq]

Great video, thanks for the calculator!

[@InvestingwithTom]

Appreciate it! Thanks for watching 🙂

[@lars-andre]

hey tom, do we assume the terminal multiple is always 15?

[@LearnEarnInvest]

In Mohnish Pabrai's Dhando Investor book, the range for terminal value is 10xFCF up to 15xFCF. Very high quality businesses with solid business fundamentals like growth, ROC, etc. such as Apple, Microsoft, Facebook, can sport a FCF Multiple of 15... where copmanies with poorer fundamentals and liekly high levels of debt with lower ROC will be given lower multiples... however, DCF may not always be the best way to value a company such as Ford. Tom has video where he goes over this. His video is an Intrinsic Value vid with apple and ford stock examples.

[@TButlerDrums]

Hi Tom, Great Video. I'm interested if the process above can work with negative values, ie, when the company is posting annual losses but due to investing rather than lack of increase in revenue?

[@LearnEarnInvest]

Hi Tristan, The above method would not work for negative FCF companies. If an investor has an edge from deep knowledge on a company or industry they could potentially use it for that company... but it would be difficult to come up with an intrinsic value.

[@leemenc1]

Great analysis. It would be great if you can cover all FAANG stock. Thank you.

[@InvestingwithTom]

will see what I can do :)

[@cricbuzz1123]

Yep, please do

[@AttilaLengyel94]

Thanks for the excellent video! Do you have any tips on how to decide on a sensible discount rate? For example, would it make sense to pick the average annual return for the S&P 500, being an investment with a similar (potentially smaller) risk?

[@miguelvargas4638]

Why does your discount rate fell from 15% to 10% from the last video you made?

[@triswilliams]

Can you do a video on Air BNB!

[@flybird730]

Thanks for the video. The net cash or net debt value you used is not correct.You should have used cash & short term investment - total debt from the balance sheet which would have been more accurate representation of net cash or net debt.

[@mogayasuddin6639]

Thanks for the calculator. good informative video.

[@InvestingwithTom]

Glad you liked it!

[@johnnyblaze373]

Hi Tom, great channel! Ive been reading Phil Town's Payback book, he says to avoid tech stocks pretty much and thats why im reluctant to stockpile FB, as tempted as I may be. What do you think? Also, in the book he doesn't mention this next point bur is it better to stockpile US stock vs Aus/NZ? Ive been stockpiling two Au stocks and only thought of this now, can decent money still be made investing into the AX and NZ markets for value/growth investing? Like to know your thoughts, for education and entertainment purposes only of course.

[@InvestingwithTom]

I think the tech company question depends on the business and your circle of competence. Are you confident the company will be larger in 10yrs than it is today etc. And the country makes no difference IMO

[@johnnyblaze373]

Mate, appreciate the reply! Simple yet insightful. Cheers. Go all blacks

[@scottiebumich]

Looks like their growth is going to stay above 20% you for some time to come (as rev per user increases and they continue to add more international users).

[@dmk8791]

Nice analysis but I personally find 50% MOS for momentum stock's are rarely ever hit, I doubt we'll see FB around $150 again unless there is another Crash as large as the last one, it doesn't happen often and you'll be sitting on the side lines for a while. Although I hope it does 🙂

[@theg9811]

Good job tom. Would love to see how you manage foreign income ie dividends, profits from say US companies into your NZ accounts? There seems lots of fee's and costs to invest in overseas businesses.

[@pratikpawar3022]

Quality content Tom. Keep it up.

[@Alienodds]

Hey Tom, I did a similar video the other day. Great minds think alike, again!

[@InvestingwithTom]

;)

[@jonnycash6474]

Tom you legend mate! thanks

[@nolden0079]

Great Video as always

[@AaronHamkins]

Great content! Keep it up

[@aljones7333]

Another great video mate 👏

[@InvestingwithTom]

Thank you!

[@AndrewLetendre]

Nice video as usual bud!

[@InvestingwithTom]

thanks man!

[@JoshuaWang]

Good clear explanation! I'm buying!

[@InvestingwithTom]

Not on my advice 😅

[@barrycharles]

Nice I believe even at $300 is a bargain :)

[@Gojirella]

Thank you so much for the calculator

[@naftalymaganjo3535]

Thanks alot.

[@Mrluckyjo]

keep the vids coming!!

[@InvestingwithTom]

Will do! Thanks for watching

[@bradleyhayes3480]

Nice work 👌

[@InvestingwithTom]

thanks mate!

[@amandeepsinghpannu1372]

FB Cash is $58 billion and current liabilities are $11 billion. (Current assets are $68 Billion) Their quarterly June 30 2020 Balance Sheet does not show any debt. Would your Intrinsic Value Calculation change ?

[@InvestingwithTom]

Potentially yes, I'd have to recheck the numbers

[@andre6228]

Where do you get that information?

[@amandeepsinghpannu1372]

@@andre6228 Check company’s financial statements on their website

[@ims7865]

Good video Tom! I want to share something: You value investors guys should check ARLP stock. It has a value investors club write up that is very good. Basically the stoxk is now super cheap, with huge potential. It trades around 0.3 bookvalue and has good competitive advantages in a industry that will slowly die (but in 15-20 years). You should check it out ;)

[@InvestingwithTom]

Interesting. Sounds slightly scary but will have to take a look

[@ims7865]

@@InvestingwithTom it heads i win, tail i don't lose anything. At first, i also was scarred, but the more i read, the more i understood that ARLP is so better positioned in the coal market, that will exist for long time, and their competitive advantage (price and location of mines) are durable.

[@biglebowsky1988]

Great video

[@InvestingwithTom]

thanks!

[@rubend716]

Great video Tom! Just wondering about the number of shares outstanding used... Facebook as a company consists of 2.4b Class A shares and another 0.44b Class B shares that are not publicly traded. Wouldn't you have to use the total of 2.84b shares for the calculation?

[@Sam-yu4ve]

Looks a decent buy at current price ($263)

[@InvestingwithTom]

three most important words in investing are margin of safety :)

[@vihangchaudhari]

I calculated with Rule 1 method and got intrinsic value about 313 dollars. Hmmm well I’m gonna try Dhandho investor strategy.

[@martinrojas8545]

Hi! What's that strategy?

[@vihangchaudhari]

@@martinrojas8545 that’s rule number 1 strategy of Phil town’s book rule #1 investing

[@martinrojas8545]

@@vihangchaudhari ✍️ thanks! And the Dhandho strategy is better?

[@vihangchaudhari]

@@martinrojas8545 I haven’t calculated using that Dhandho strategy, I’m still reading the book Dhandho Investor, half way there.

[@xristofer7319]

Explain me please where you found discount rate 10% ???I cant founded 🙄

[@BradKaellner]

As THE MOST owned business by SuperInvestors according to Dataroma, it's going to be tough to get a large margin of safety on this one! Unless we get a stock market meltdown...

[@InvestingwithTom]

Fingers crossed ;)

[@jefferyscott5721]

Ich habe Code_unlock7 auf Instagram dringend empfohlen, er hat einen guten Job gemacht

[@jefferyscott5721]

Sie sollten Code_unlock7 auf iG ausprobieren. Dies ist ein sehr empfehlenswerter Profi

[@quanncruise2987]

Great video ! Instagram : @wallstreetboul

[@michealanderson1294]

Sie sollten Code_unlock7 auf iG ausprobieren. Dies ist ein sehr empfehlenswerter Profi