When it comes to investing in technology for growth, there are limited options in Canada. Yet the technology sector has been (and continues to be) one of the best places to invest for growth in the past decade or so.
Growth stocks are businesses with above-average growth that should be sustainable for at least the next few years.
The real average market returns are 7% after inflation, and the nominal returns are 10% including inflation. So, growth stocks should be growing their earnings per share (EPS) by at least 10% per year.
If you invest for a return of 10%, it’ll take about 7.2 years to double your money. By aiming to invest for a higher rate of return, it should take fewer than 7.2 years to double your money, given that you don’t overpay for growth.
Here’s a tech stock that has the potential to double your money faster than if you were to invest in the general market.
Facebook Inc. (NASDAQ:FB) is the world’s largest social media network. As of the end of the first quarter Facebook had more than 1.6 billion monthly active users and more than 1.5 billion mobile monthly active users.
The functions Facebook offers include sharing videos and photos, a personalized news feed that keeps users updated on what’s important to them, and Messenger, which helps users connect with friends and family in a private setting. Instagram and Whatsapp are also a part of Facebook. These all contribute to the user stickiness to Facebook as a whole.
Amazing growth
As a result, Facebook has been growing at a tremendous rate. Since its initial public offering (IPO) in May 2012, the shares have tripled from roughly US$38 to US$114 per share, despite the news that it was way overvalued at IPO and fell as low as US$18 per share in August 2012.
Shareholders will be relieved to know that Facebook’s EPS have more than kept up with its share-price appreciation. From 2012 to 2015, Facebook’s EPS have more than quadrupled. This is thanks to its growing number of users and their growing engagement, which attract advertisers.
Advertising revenue
Since Facebook knows its users’ interests based on their engagement, it can target users with ads and increase the return on investment for advertisers. This is of utmost importance because Facebook earns more than 90% of its revenues from advertising.
It earns about 50% of its revenues from the U.S. and Canada, about 25% from Europe, and about 15% from Asia-Pacific.
Going forward
Facebook’s EPS are estimated to increase at a compound annual growth rate of about 32%, which would make it a fair buy at today’s price of about US$116 per share at a multiple of about 39.
Conclusion
Investors should also note that Facebook essentially has no debt, so it can’t go bankrupt. At the end of the first quarter, it had cash and cash equivalents of about US$6.4 billion and about US$14.1 billion in marketable securities.
If Facebook’s multiple remains constant and its EPS growth of 32% per year materializes, an investment in Facebook can double in fewer than three years.
