TIP355: Why Facebook Is A Value Stock w/ Bill Nygren & Mike Nicolas

Episode Summary

Executive Summary: Oakmark’s Bill Nygren and Mike Nicholas argued that Bank of America is still attractive but less of a bargain after its rebound, while Facebook is a more surprising value opportunity: a dominant ad platform with strong cash generation, optionality from Reality Labs, and substantial hidden value in cash and non-core assets. Their framework emphasizes relative valuation, downside protection, and long time horizons—usually about seven years.

Main Topics: Bank of America: still attractive, but less of a bargain (Priority: 5/5): They revisited Bank of America after a 100%+ share-price rise, saying it moved from 'real cheap' to merely 'cheap.' They still like the bank based on earnings power, excess capital, and improving fundamentals, but acknowledge the opportunity is much smaller than in 2020. Banks vs. fintech/disruption fears (Priority: 5/5): The discussion addressed whether Square, PayPal, and DeFi threaten traditional banks. Oakmark argued banks provide a much broader suite of services than payments alone and have stronger downside protection because of tangible assets and book value support. Facebook as a value stock (Priority: 5/5): Oakmark made the case that Facebook looks cheap on a core-business basis, despite its growth and tech-like profile. They framed it as an advertising/media business with network effects, high margins, and hidden value in cash and non-ad businesses. Reality Labs and 'moonshot' R&D (Priority: 4/5): They treated Facebook’s heavy spending on virtual/augmented reality as asymmetric optionality: expensive today, but potentially huge if it succeeds. If it fails, shutting it down could materially lift margins and cash flow. Capital allocation and share buybacks (Priority: 4/5): They praised Facebook’s buybacks and cash accumulation, arguing repurchases are beneficial when done below intrinsic value. They also noted that excess cash is not a drag if management can recycle it into undervalued share repurchases or high-return projects. How Oakmark evaluates growth companies (Priority: 4/5): They explained that 'tech' labels can be misleading and that companies like Facebook, Amazon, Alphabet, Apple, and Netflix can still fit a value framework when bought below market multiples and evaluated with multiple valuation methods. Valuation horizon and limits of forecasting (Priority: 3/5): Oakmark stressed that their valuation horizon is about seven years, not 15-20. They believe the market often overestimates the durability of long-term growth and moats, so they focus on more bounded but still durable forecasts.

Key Arguments: Bank of America remains attractive because its balance sheet is stronger, underwriting improved, and it can still earn a low-to-mid teens return on tangible common equity over a cycle. Even after the rally, Bank of America still trades at a valuation that is reasonable versus its normal earnings power and long-term bank multiples. Traditional banks offer broader functionality than fintech apps: lending, mortgages, wealth management, capital markets, liquidity provision, and deposits. Banks have better downside protection than many fintechs because they own tangible assets and can often liquidate near book value. Facebook’s core ad business deserves a market or better multiple because it has dominant scale, strong network effects, and extremely high incremental margins. Street analysts may understate Facebook’s value by not properly crediting the cash, Instagram, WhatsApp, and Reality Labs optionality. Reality Labs is a high-cost but potentially transformative investment; if it fails, losses can be removed, and if it succeeds, it could become extremely valuable. Privacy and targeting changes have repeatedly been feared, but Facebook has historically adapted well and still maintains strong ad ROI versus alternatives. Oakmark’s willingness to own companies like Facebook and Amazon rests on valuation, not on classifying them as 'tech' stocks. Their stock-picking framework uses multiple valuation lenses, but they stop relying on a business's long-dated forecasts when the outlook gets too uncertain beyond about seven years.

Data Points: Bank of America share price change: rose from about $21 to over $42 - Referenced as a 100%+ gain since Oakmark last discussed the stock in 2020 Bank of America earnings last year: nearly $2 per share - Despite pandemic disruption, zero rates, and limited buybacks Bank of America excess capital: almost 10% of market cap - Capital above regulatory requirements at the most recent quarter Bank of America loan-to-deposit ratio: 50% - Indicates weak loan demand and significant unused funding capacity Bank of America valuation: about 11-12x normal earnings - Oakmark’s estimate after the stock’s rebound Bank of America valuation vs tangible book: about 1.8x tangible net asset value - Compared with around book value when last discussed Facebook monthly active users: over 2.8 billion - Current scale of the platform discussed in the episode Facebook total service reach: about 3.5 billion people monthly - Includes Facebook and other services, as discussed later in the interview Facebook revenue growth: 37% top-line revenue growth - Host cited recent growth metrics Facebook free cash flow growth: 27% over the last five years - Host highlighted long-term cash generation Facebook organic ad revenue growth: north of 40% - Most recent quarter at the time of the episode Facebook other revenue: over $700 million in Q1 - Non-ad revenue, largely Reality Labs Reality Labs losses: $6-7 billion per year - Third-party estimates cited by the guests Facebook operating margin: 50% in 2017 - Used to illustrate margin pressure over time Facebook projected revenue: $140 billion next year - Projected sales level referenced during margin discussion Facebook margin decline: down 10 percentage points - Projected margin compression versus prior levels Facebook cash on balance sheet: around $65 billion - Discussed as a sign of strong financial flexibility Facebook liabilities: about $30 billion - Mostly operating liabilities, not debt Facebook share buybacks: nearly $4 billion in the last year - Used to illustrate capital returns Facebook net cash and investments per share: about $40+ per share by next year - Oakmark’s estimate when discussing valuation Facebook valuation ex-cash: less than 17x next year's earnings - Based on consensus forward EPS and excluding cash Market valuation: about 22x earnings - Used as the comparison benchmark Bank of America holdings policy: trim above 4% of portfolio, never buy above 3% - Oakmark’s position-sizing rules

Pivotal Quotes: "we think the banks and other financials are quite attractive today" — Bill Nygren: On Bank of America and the broader financial sector after the post-COVID recovery "Facebook's really selling at a discount PE if you're just looking at the core Facebook and Instagram businesses" — Mike Nicholas: On why Facebook can be viewed as undervalued despite its growth profile "If it never takes, and there were declines, close down reality labs, we could see billions of annual losses potentially evaporate" — Mike Nicholas: On the upside/downside asymmetry of Facebook’s Reality Labs investments

Implications: Listeners should rethink simplistic 'tech vs. value' labels and focus on business quality, balance-sheet strength, and valuation. The episode suggests banks still offer upside with protection, while Facebook may be cheaper than it appears once cash and optionality are accounted for.