The Secret to Finding Profitability AND Growth

Our latest capital-efficient stock is soaring... 'The potential value is mind-boggling'... Why Facebook is so rare... The secret to finding profitability AND growth... Stansberry Venture Value is closing soon...

Porter and his team of research analysts devoted the December issue of Stansberry's Investment Advisory to social-network behemoth Facebook (FB)... Stansberry Venture Value is closing soon...

By now, chances are good that you probably have a Facebook account. Over the last 12 years, the company has grown from an online yearbook at Harvard University to the world's largest and most valuable social-media network. More than 1.7 billion unique monthly users visit the site (including more than 1 billion who use it every day). And it's still adding nearly 1 million new users every single day.

As Porter's team put it: "The potential value of a global network, linking every individual in the world, is mind-boggling."

Unlike former competitor MySpace – the largest social-media website in the world until 2007 – Facebook wasn't in a hurry to monetize itself. MySpace cluttered its webpages with tons of ads, making it clunky, slow, and difficult to use. Meanwhile, Facebook kept its advertising to a bare minimum. From the issue...

When the time was right, Zuckerberg chose an advertising model to generate the revenues that would pay for all those servers. Facebook charged firms for the right to access its free users. This user base is extremely valuable because Facebook knows a lot about them. It knows who they are, where they are, and what they like.

Around the same time, Facebook added a "simple one-directional opt-in feature" – the now-famous "Like" button. It became hugely popular... and important. More from the issue...

If Facebook can figure out you are 45 years old and that you "like" BMWs, Gerber baby bottles, and Giant-brand bicycles... then it knows you are a perfect match for a targeted advertisement for a coupon for a premium child's car seat. It's not a gaudy ad. Just a simple message in the corner of your screen: "The Safest Car Seats Around." An ad doesn't mean you will buy it. But you are much more likely to if you are 45, and you like cars and baby bottles.

Google does the same thing with targeted advertising, but it only gets your search history as data. Meanwhile, Facebook has everything: all your friends, all your captions, all their captions, and everyone's photos.

As you can imagine, the more users Facebook has, the more valuable its data are to advertisers. The company already generates billions of dollars a year in advertising revenue, growth of nearly 400% over the past four years.

Not only is Facebook highly profitable and scalable... it's also incredibly capital-efficient...

Over the last four years, Facebook's revenues, margins, and free cash flow have all grown at an impressive clip. Last year, more than half of its sales turned into profits. Despite spending more than $3 billion in capital expenditures, the company generated $6 billion in free cash flow. And because of its unique business model, as it continues to grow, it will become even more capital-efficient. Plus, as Porter's team noted, Facebook's balance sheet is pristine...

The company has no long-term debt. Zero. And it has $26 billion of cash and securities. That's more cash than soda giant Coca-Cola has. Only 12 nonfinancial companies in the world have more cash than Facebook. That immense pile of cash allows the company to continue investing in its cloud-storage and server-farm infrastructure or make additional strategic acquisitions as opportunities arise.

In 2011, the year before its IPO, Facebook generated around $3.7 billion in sales. Last year, revenue was just shy of $18 billion. That's 383% growth in four years, or 48% per year. And it keeps growing. This year, the company will top more than $27 billion in sales – 52% higher than last year.

That's the kind of growth Amazon was regularly posting five years ago. But unlike many growth companies (including Amazon), Facebook actually makes money... lots and lots of it.

And the best part is that it's a highly scalable business. While revenues have been growing at staggering rates... margins and profits have been growing even faster. The company reported profit margins of 20% last year. And it's on target to increase those to more than 30% for 2016. Those numbers are outstanding.

As Porter's team explained, the key to Facebook's success lies in mobile advertising...

Mobile advertising is king. Across the board, mobile ads bring in about twice as much revenue as desktop ads. According to Bloomberg, Google and Facebook will control roughly half the mobile-ad sales this year.

Today, 93% of Facebook's users access the network from a mobile device compared with only around 50% five years ago. That places the company in pole position for mobile advertisers.

Facebook capitalized on the shift from personal computers (PCs) to mobile devices (phones and tablets). In 2012, mobile-advertising revenue made up only 10% of the company's advertising revenue. Now, mobile ad revenue accounts for nearly 85%.

But Facebook isn't betting the farm on its ad revenues alone...

In 2012, the company purchased fellow social-media network Instagram, a peer-to-peer picture-sharing network, for $1 billion. At the time, it had just 30 million users. Today, it's the eighth-largest social-networking site in the world, with more than 500 million people using the app.

Two years later, Facebook spent $22 billion to purchase messaging service WhatsApp. Today, it's the second-largest social-media network – sandwiched between Facebook and Messenger, Facebook's other messaging app.

Around the same time, Facebook bought virtual-reality firm Oculus for $2 billion. As new technologies like virtual-reality headsets, ultra-high-definition 4K screens, and phones with 3D cameras continue to emerge, Facebook has made it a priority to stay one step ahead of these megatrends.

And Porter's team expects the company will follow the same "wait to monetize" model with these acquisitions that it used so successfully itself. In fact, it has already done just that with Instagram...

Facebook did not start monetizing Instagram until late last year. And already, according to Credit Suisse estimates, Instagram accounts for 10% of Facebook's revenue. Credit Suisse also estimates Instagram will be worth $3.2 billion once 2016 numbers are tallied... According to these estimates, Facebook will triple its return in four years.

In sum, Facebook's days of hypergrowth should continue...

Last year, the average return per user (or "ARPU") in the U.S. and Canada was $41.65. But despite making up just 14% of Facebook's active users, the U.S. and Canada generated half of the company's revenues.

Nearly three times more users are located in Asia, whose ARPU was just $5.45 per user. In Africa, Latin America, and the Middle East, who combine for 587 million active users – that number was just $3.74 per user. And Porter and his team say that's great news for Facebook...

Meanwhile, the number of monthly active users is growing fastest in Asia Pacific and the Rest of World regions. These regions are growing around 15% annually compared with around 7% in Europe and 5% in the U.S. India and Brazil saw some of the biggest increases in monthly active users ("MAU") last year.

Facebook's strategy seems to be growing MAU in developing markets and growing ARPU in more stable, saturated markets like the U.S and Canada... If Facebook can figure out a way to grow its ARPU around the world to the levels it has in the U.S., it still has tremendous growth potential ahead of it (even without significant growth in users).

Europe and the U.S. are similar sized economies with roughly the same disposable incomes and purchasing power. So we know that Europe has the potential to triple its ARPU to levels similar to the U.S. in the years ahead. The Asia Pacific and Rest of World regions ARPU could triple and would still be less than half of the U.S.'s current average.

Porter's timing was prescient. Shares closed at a multi-month low of $115.40 the evening subscribers received the issue, and have been moving nearly straight up since. Yesterday, shares closed at $135.36. Readers who followed Porter's buy advice are already up more than 17% in less than three months. Kudos to Porter and his team for another great call.

But we don't bring up this recommendation simply to brag...

It's also a powerful example of what can happen when you find a company that is both highly capital-efficient AND able to grow revenues quickly.

Unfortunately, most companies aren't Facebook. This combination is extremely rare... at least, in the universe of stocks most investors follow.

Regular readers know we believe buying capital-efficient businesses is one of the simplest and surest ways to build long-term wealth in the markets...

But most of the best-known examples – like fast-food giant McDonald's (MCD) or chocolatier Hershey (HSY) – are mature businesses. They can grow steadily, but not quickly. They're simply too large now to double revenues every few years.

On the other hand, many high-flying growth stocks aren't even profitable, let alone capital-efficient. And when – or if – they eventually focus on profitability, their growth often plummets.

So many investors believe they have to choose between "boring" companies that can produce slow but steady growth for years... or high-growth, high-volatility "story" stocks that can boom or bust.

But this isn't always the case...

It's true that high-growth, high-profitability businesses like Facebook are virtually unheard of among large-cap stocks. But they're less rare among the universe of small-cap stocks...

Of course, this should come as no surprise. Small companies – defined as those trading for less than a $1 billion market capitalization – are capable of growing revenues much quicker than larger firms. Once a company reaches a certain size, it becomes much harder to "move the needle."

So if you simply expand your search for high-quality, capital-efficient businesses to those that are still small – the smaller, the better, in fact – you're far more likely to find safe stocks capable of returning 20%, 30%, even 50% annually, year after year.

Of course, this is exactly what our brand-new Stansberry Venture Value service is designed to do...

Porter and senior analyst Bryan Beach use their proprietary screening system – which assess a company's size, capital efficiency, growth, valuation, and more – to uncover the most promising high-growth/high-profit stocks with the potential to return 1,000% or more over the long term.

Regular readers know Porter shared basics on this strategy in the February 10 Digest. And thousands of you attended our live online event last week where he explained it in detail. So we won't rehash it all here.

But if you've been considering taking advantage of a discounted charter membership to Stansberry Venture Value, we must hear from you soon.

Because these stocks are too small and thinly traded to recommend to a large audience, we must limit the number of subscribers we allow into this service. So we will be closing the doors to new members this Tuesday. And we simply don't know when (or even if) we'll be able to open membership again... but it will certainly be at a much higher price if we do.

Click here to learn more about a charter membership to Stansberry Venture Value now. (This does not lead to a long promotional video.)

New 52-week highs (as of 2/23/17): China Construction Bank (0939.HK), Industrial and Commercial Bank of China (1398.HK), Bank of China (3988.HK), American Financial (AFG), American Express (AXP), Axis Capital (AXS) Boeing (BA), Becton Dickinson (BDX), Berkshire Hathaway (BRK-B), CBRE Group (CBG), C.H. Robinson Worldwide (CHRW), iShares Select Dividend Fund (DVY), Cedar Fair (FUN), PureFunds ISE Mobile Payments Fund (IPAY), JD.com (JD), 3M (MMM), Altria (MO), PNC Financial Warrants (PNC-WT), ProShares Ultra Financials Fund (UYG), and W.R. Berkley (WRB).

In today's mailbag: One subscriber weighs in on Fannie and Freddie... more feedback on the latest essay from P.J. O'Rourke... and Stansberry Venture Technology editor Dave Lashmet responds to a reader's complaint. What's on your mind? Let us know at feedback@stansberryresearch.com.

"When [the Fannie Mae and Freddie Mac] trade was put on 7 months ago I bought 1000 shares of each stock. Later when it was possible to sell 350 shares of each stock to recoup the cost of the 1000 shares each, I did so. In essence I'm in the trade at no outright cost with 650 shares of each. I think I'll stick around and see what the final outcome is going to be. Thanks Porter. Without my Alliance membership I'd have never had that opportunity." – Paid-up subscriber John P.

"I can't resist a comment... To Gary Burfoot, who commented in part, 'I would have thought Stansberry folks would be a bit more, er, sophisticated.' The presumption that those who disagree with you are unsophisticated is a prime example of the egotistical left's behavior and narrative that has caused such a significant right leaning backlash.

"Similar to the way the assumption that people who voted for Trump might be stupid because they'll get less benefit from the government, as the only possible conclusion, avoids the possibility of other valid conclusions. E.g. maybe they don't think maximizing what you *get* from the government is the primary purpose of government. Maybe they realize that the government doesn't create, it only takes and gives, and don't like it taking more to give more, even if it would be giving more to them. Maybe they still have a shred of morality left to guide their political decisions.

"All that said, both candidates were poor. I will avoid a tit for tat listing flaws in the other. But I can't imagine the major indices would be at the same level if results had been different. And I am interested in ways I can use my capital to generate profit. And for that I thank Stansberry [Research] for being apolitical, and primarily noticing politics only as a source of amusement. I'll part with one thing it seems we can agree on. The government should be less powerful, in all branches, and hopefully smaller as well." – Paid-up subscriber John Ware

"Hey Porter, I find it interesting that every reader who disagreed with Mr. O'Rourke found our current President wanting on the basis of their own personal unsophisticated fear. The man has been in office barely a month and has been wholly demonized by those who supported the previous administration because he wants to go in a different direction, a direction wholly supported by the vast majority of these United States. (Don't complain to me about popularity votes as they have never had anything to do with electing our President.) Hold your fears in check until you have something to talk about other than your fear itself. With any luck the bloated organization we call Government will get a bit more efficient in its operation and expenditures, and get out of my life so I can get the job done." – Paid-up subscriber Bruce K.

"I have to admit I am happy and thankful my Left leaning friends and associates via Stansberry Research (including P.J.) are in a complete panic about government overreach and excessive power in government. When they were on the delivering end of that tyranny they thought government was a big fuzzy teddy bear who tucked them in at night and watched over their sleep. Now they have discovered to their lament that government is made up of a group of evil, malicious, avaricious, incompetent and self absorbed sociopaths. Good. I hope they learn their lessons well over the next eight years and don't offer us another Hobbs choice in 2024. Especially when the horse closest to the door herself exemplified the worst characteristics of an embedded tick. 2016 was the Flight 93 election. Next time don't let the box cutter lady (or one like her) in the cockpit..." – Paid-up subscriber William C.

"I read the comments [about Biogen and Alzheimer's], and while my comments won't be posted more than likely, it' ok. The fact that these companies want to target protective mechanisms the body puts in place is what is the complete joke of it all. Amyloid plaques are not the cause of Alzheimer's it's the effect of Alzheimer's and since drugs don't address causes and only effects, while they can be profitable for investors via fraud in tricking the body, they're not successful in bringing good health and if one really wants to bring good health, no drug can fix that. ZERO!!! They can fix numbers and that's all.

"While investors may find a way to profit off these things short term in the long run it will be a failure, just like statin drugs are a failure to sparing people from heart attacks (it's not widely accepted yet so there's money to be made which is your job, but reality is that it's bogus science that government protects, via the fraudulent FDA.)

"They can all be beaming it's just over their pocketbooks and hoping the fraudulent FDA gives them approval for something that won't actually bring true health to anyone, may make them live longer but the quality of life won't be better because no drug does such a thing. It's all disease management. The amyloid plaques is the body trying to protect itself. I can only image how getting rid of that will harm the people. It's like statin drugs, so cholesterol doesn't build up in the arteries and not calcium deposits take its place. Doc Eifrig is smart enough to talk about this and I give him credit because western medicine wants to bamboozle people and while I don't agree with him 100%, he's not stupid either!

"I wouldn't risk my dollar on Biogen personally but I'll let others hope and pray the fraudulent FDA covers their fannies. I mean we live in reality, and that's what goes on and so it's not absurd to take that risk, just like it's not absurd to invest in a too big to fail bank (I personally like C and own shares even if Stansberry doesn't but it's near my exit point as well). I have no doubt the Biogen product will not truly solve Alzheimer's but they may affect amyloid plaques, it still won't help brain function unless people fix their eating habits of garbage junk food, which is 99% of the population, myself included working in a pizzeria. I'm just as much at fault for my future demise!" – Paid-up subscriber Dave D.

Dave Lashmet comment: Dave, since you raised the issue, we can consider statins and Alzheimer's together... But we'll be brief. Here are two fields of medicine in 10 bullet points:

1. Statin drugs can cut the relative risk of heart attacks and strokes roughly by half – that's why millions of people take them.

2. Diet, smoking, exercise, and the "luck of the draw" for human genes all affect your blood levels of bad cholesterol, which statins help cut.

3. Bad cholesterol, white blood cells, and bacteria form a plaque with a cap on it inside your arteries – the blood vessels coming from your heart.

4. If the plaques get too thick, this restricts blood flow... especially to your most vital organs, like your heart and brain.

5. If a cap breaks and the plaque pours into your blood stream, this can form a blood clot, which can get stuck in narrowed blood vessels.

6. Either outcome (or both) is bad for a patient. That's why cutting bad cholesterol up front helps reduce relative risk. It doesn't yet eliminate it.

7. Fortunately, as Amgen showed, PCSK9 drugs combined with statins can cut bad cholesterol so low, this seems to be clearing blood vessels of plaque.

8. Alzheimer's plaque is different than arterial plaque – Alzheimer's plaque is caused by deposits of beta amyloid proteins, a natural antibiotic, inside your brain.

9. Biogen found, by making a specialized antibody that targets beta amyloid deposits in the brain, it can eliminate them – and stop cognitive decline.

10. This was a placebo-controlled study published in Nature. So early results show this works. Without Biogen's antibody, Alzheimer's is a progressive, fatal disease.

So you can eat pizza and throw stones. Or you can take statins, Amgen's PCSK9 drug, and Biogen's antibody. Guess which choice gives you 10 more years of life?

Regards,

Justin Brill
Baltimore, Maryland
February 24, 2017