This Is Why I'm Comfortable Holding Facebook Stock for the Long Haul

By Markets Fool.com


A fortress balance sheet allows companies to survive and thrive through good and bad times. Image source: iStock/Thinkstock.

Continue Reading Below

Facebook is constructing a balance sheet that will be able to sustain it through even the worst economic downturns in the future. This is the sign of a prudent and responsibly led company that's built to last. It's also one of the reasons I feel so comfortable holding its stock for the long haul.

When most analysts and commentators talk about Facebook, they focus on its income statement. And for good reason, as it's deep in the throes of scaling up its revenue and earnings after concentrating for years on growing its network of users.

In the latest quarter, Facebook's revenue increased by 52% compared to the year-ago period. This was fueled by a 57% year-over-year growth in advertising revenue. Its mobile advertising efforts have been particularly fruitful, accounting for 82% of its total advertising revenue in the three months ended March 31.

Data source: YCharts.com. Chart by author.

But even though Facebook's income statement is the focal point of analysts' attention, its balance sheet will prove to be an equally important piece of its success in the future.

Continue Reading Below

Companies with "fortress" balance sheets -- a termJPMorgan Chase chairman and CEO Jamie Dimon has made popular in the bank industry -- are positioned not only to succeed in the short run, but also to ride out the many recessions they will encounter over a longer period of time.

A fortress balance sheet enables a company to fund its operations without resorting to outside lenders or the credit markets, both of which tend to seize up when the economy takes a turn for the worse. The two most important components are a lot of cash and little debt.

Facebook's balance sheet satisfies both requirements. It had $23 billion in current assets (excluding prepaid expenses) at the end of the first quarter. That consisted of $6.5 billion in cash, $14.2 billion in marketable securities, and $2.4 billion in accounts receivable. The first two alone are enough to cover a year and a half's worth of its operating expenses.

Facebook also has no debt. It has other financial obligations, such as leases and accrued expenses, but these are minimal when you compare them to the company's liquid assets: its cash and marketable securities. Facebook's balance sheet, in fact, contains 10 times more equity than liabilities. And this multiple is expanding every quarter, given that Facebook retains its earnings as opposed to distributing them to shareholders.

Data source: Regulatory filings. Chart by author.

The relationship between Facebook's equity and liabilities is unique even when you compare it to Alphabet , the parent company of Google. At the end of the first quarter, Alphabet's shareholders' equity equated to five times its liabilities.

There's no question Alphabet is an incredibly secure company -- perhaps the most secure company of all right now given its dominance of online search. But even Alphabet has debt, roughly $5 billion worth. This is a fraction of its operating cash flow, which came in at $7.6 billion last quarter, and it also likely reflects an opportunistic move by Alphabet to benefit from historically low interest rates. But it's still debt.

Beyond buttressing a company against downturns, a fortress balance sheet empowers it to exploit intermittent self-inflicted crises that cause its stock to drop. It's hard to image Facebook experiencing one of these anytime soon, but you can rest assured that it eventually will. By keeping its balance sheet stuffed with cash and marketable securities, it will have plenty of ammunition to repurchase stock at a discount if and when this happens.

You needn't look any further than Chipotle Mexican Grill to appreciate the value of this flexibility. Since the end of last year, the burger chain's stock has dropped by 40% following a food-borne illness outbreak at some of its restaurants in Washington and Oregon. But by stockpiling cash and avoiding debt, Chipotle has been in a position to repurchase an unprecedented amount of its own stock.

Data source: YCharts.com. Chart by author.

The benefit from this approach won't be obvious until Chipotle's customers return in full force. However, when they do, and when Chipotle gets back to earning the profits it once did, its income will be spread among fewer shareholders. This will serve as an accelerant on its stock price.

Facebook understands this. Its shareholders will too, someday, when the inevitable time comes that Facebook's balance sheet temporarily displaces its income statement as the focal point of investors' analyses.

The article This Is Why I'm Comfortable Holding Facebook Stock for the Long Haul originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Maxfield owns shares of Chipotle Mexican Grill and Facebook. The Motley Fool owns shares of and recommends Alphabet (C shares), Chipotle Mexican Grill, and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.