Facebook gets a new Street high price target, while news ebbs and flows regarding US-China tech relations.
By Brian Nelson, CFA
There’s a new Street high price target on one of our favorite ideas, Facebook (FB), and it’s $275 per share. Facebook has been the most recent 10 on the Valuentum Buying Index, and despite ongoing “noise” with respect to the Cambridge Analytica scandal, we value shares at $250 each. We’re also reiterating our view that our discounted-cash-flow-based valuation only considers ongoing trends on an advertising-only business model, not incremental upside from processing payments on its platform or innovation at Instagram, which recently put together a new product called IGTV, a You-Tube-like offering. We think the Facebook “story” is still in the early innings, and the company is backed by a pristine net-cash-rich balance sheet and tremendous free cash flow generation. There may be some more negative headline news on the horizon given data security issues, but any developments on this front will only serve to shut out new competition, making it harder for others to enter the space that Facebook now dominates. We continue to like this 10-rated-VBI stock.
As we continue to expect, news regarding trade wars will continue to get the most air time at the top media networks, and this is only to be expected as President Donald Trump plays hard ball with China (FXI, MCHI) to achieve a better trade agreement for the US. We continue to believe that any tariffs are a means of posturing and that over time, both the US and China will come to the table to work things out in a mutually beneficial way. That doesn’t mean that we won’t see tit-for-tat retaliation for some time; it just means that over the long haul, we’d expect reasoning and rational decision-making to prevail. In the meantime, however, we might expect news to ebb and flow, with the recent gyrations happening in the semiconductor space (SMH, QQQ) regarding US-China tech relations, with Micron (MU) more specifically:
Micron Technology, Inc. announced that the Fuzhou Intermediate People’s Court, Fujian Province, China today notified two Chinese subsidiaries of Micron that it has granted a preliminary injunction against those entities in patent infringement cases filed by United Microelectronics Corporation (UMC) and Fujian Jinhua Integrated Circuit Co. (Jinhua). The patent infringement claims of UMC and Jinhua were filed against Micron in retaliation for criminal indictments filed by Taiwan authorities against UMC and three of its employees and a civil lawsuit filed by Micron against UMC and Jinhua in the United States District Court for the Northern District of California for the misappropriation of Micron trade secrets.
The preliminary injunction enjoins Micron’s Chinese subsidiaries from manufacturing, selling, or importing certain Crucial and Ballistix-branded DRAM modules and solid state drives in China. The affected products make up slightly more than 1% of Micron’s annualized revenues. Since the fourth fiscal quarter is underway, Micron anticipates that the negative impact to revenue this quarter relating to the injunction will be approximately 1%, and the company continues to expect revenue to be within the previously guided range of $8.0 to $8.4 billion. Micron will comply with the ruling while requesting the Fuzhou Court to reconsider or stay its decision.
Though at face value, it appears this particular injunction is immaterial to Micron’s business, given that its forward guidance remains unchanged, the ruling may be a foreshadowing of what could come should trade spats intensify. China remains a key market for many tech companies around the world, especially as it relates to their respective long-term demand profiles, and as a result, we wouldn’t expect anything short of ongoing market volatility around news releases tied to US-China tech relations, which if not enhanced, could hinder the technology supply chain and ultimately global economic growth. We wouldn’t expect the US or China to back down anytime soon, but in the intermediate term, we would expect both to come to the table to iron out any differences for the benefit of both. Our favorite tech ideas are tried-and-true, big or mega-cap in nature, have solid competitive positions and generate strong free cash flow to bolster their already-strong and generally net-cash-rich balance sheets.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.