Facebook is another free cash flow cow — it makes so much FCF we can use this to predict its stock price.
Facebook produced an astounding $9.22 billion in FCF this past quarter, 91% more than it made last year. This is shown by Facebook on page 9 of its recent earnings release. You don’t have to figure this out yourself — the company does the calculation for you.
Moreover, this $9.22 billion FCF was also 55% more than the prior quarter 5.95 billion FCF. In other words, Facebook makes so much money selling advertising its excess or “free” cash flow is growing 55% quarter-over-quarter.
That means its stock price is going to rise. No wonder it is up over 31% in the past year. However, recently the stock has been fairly flat. So focusing on FCF might be able to help us see where it will be in one year.
For example, in a recent article, I estimated that Facebook will likely produce $32 billion in FCF this year. This is up 39% from the $23 billion in FCF it made last year.
Its present FCF yield is 3.0% (i.e., $23 billion divided by $752 billion). Therefore, using a 3.0% FCF yield, the 2021 market value should be $1.066 trillion (i.e., $32 billion divided by 3.0%). This is 41.8% over today’s market cap. That means FB stock is worth about $361.13 per share, or 418% higher.
Therefore, look for this cash cow stock to rise significantly higher this year.
And, if the market were to revalue its FCF even higher, such as at 1.9% like at AMZN, FB could be worth as much as $1.684 trillion. That would put its price 123% higher at $569 70.
You can use free cash flow to see where a tech stock price might rise. Or you can use it to see whether the company can afford to pay a dividend or buy back shares.
Moreover, using FCF yield, you can determine an exact price target for a tech stock that produces a good deal of free cash flow. We have seen from this that both Amazon and Facebook are massive free cash flow producers. Their stocks are likely to continue rising as a result.