Stock Pick of the Week: Facebook ($FB)
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Summary
📍Initially IPO’d in May 2012 at $38/share
😲Total: 3 B Daily Active People
💰Enterprise Value (EV): $697 billion in Q1 2020
📈Q1 2020 Revenue: $18.7 billion, up 11%
Facebook, initially started as a college directory for Harvard’s campus, has morphed into a global advertising juggernaut. Today, the company boasts over 3 billion daily active people (a metric the company uses for consolidating users across all of its apps), and $18.9 billion in revenue in the last quarter. Despite its record stock price at $261 per share, its success was never certain. In 2012, its CEO and one of the founders Mark Zuckerberg realized that it was about to miss the mobile revolution and ordered the entire company to double down on mobile. This was followed by the successful launch of mobile install ads. By 2015, it was estimated that mobile install ads reached 17% of total revenue that year. It also acquired Instagram for $1 billion and WhatsApp for $16 billion. Both price tags were considered outlandish at the time but turned out to be huge avenues for future mobile growth, such as commerce.
Today, Facebook is making more investments in commerce and video, and we believe that Facebook is uniquely positioned to benefit from online commerce adoption due its Instagram property and partnership strategy. However, it’s not clear if Facebook can own the social video space, as it attempts to copy TikTok, which is a wildly popular video app among teenagers, after shutting down earlier efforts (e.g. Lasso).
Did you know?
Facebook’s 2012 IPO was not generally considered a success. The company launched its IPO at $38 per share after seeing strong institutional demand but it was hit with NASDAQ computer glitches on the first day and consequently was down 16% after the first week. Many retail investors were not sure if their orders went through, and there were over 40 lawsuits in the following month over the botched IPO. In fact, the share prices did not break even until 16 month later.
But sometimes it pays to be patient in the public markets. Only 8 years later, Facebook now trades at $261 per share, or 6.9x its initial price.
Fundamentals (FY2020 Q1)
Enterprise Value (EV): $697 billion
Revenue: $18.7 billion, up 11%
EV/Next Twelve Month Revenue: 7.8x
Gross Margins: 83.4%
How Facebook Makes Money
Facebook makes almost all its money from advertising, which monetizes user engagement on its platform. This quarter, the number of ads on Facebook increased by 40% as more people spend time online while sheltering at home from COVID-19. However, the demand for ads dropped as brand advertisers pulled back. Per simply economics, more supply and less demand resulted in price per ad declining by 21%. One unique dynamic of the ad marketplace is that this is relatively fluid, and the void of brand advertising can be filled by other customers, such as gaming companies that took advantage of the price decline to show you another ad for Candy Crush. Overall, Facebook earned $6.10 average revenue per monthly active people (ARPP).
Outside of advertising, Facebook makes some money from developers using their payment infrastructure and selling hardware devices like the Facebook Portal.
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Growth Opportunities
Advertising + Global expansion: Facebook still has a long way to go in tapping its massive international user base. In Q2 2020, the U.S. and Canada accounted for just 11% of Facebook's 1.785 billion daily active users, but 50% of total revenue - demonstrating more opportunity to grow. Additionally, worldwide DAUs increased 12% to 1.79 billion on average during June 2020 - with users in India, Indonesia, and the United States representing the top three sources of growth in DAUs.
E-commerce/Shopping initiatives: Facebook has been investing in new e-commerce features like recently announced Facebook Shops, working with Shopify and other platforms to help small businesses easily start businesses on Facebook, and continuing to improve upon seamless checkout experiences on Instagram. These new e-commerce monetization initiatives could drive growth and deepen user engagement on the platform.
Privacy + Platform Integration: Given the backlash Facebook has received in recent years (like Cambridge Analytica), Facebook is undertaking a major strategic shift to privacy that could take a few years to complete. In March 2019, they announced that they will emphasize private, encrypted communication between individuals and small groups and integrate its Messenger, WhatsApp and Instagram properties. This would let users of one site communicate privately with those on all Facebook platforms, while also making the platform even stickier for users.
Mark Zuckerberg’s Facebook Post on 2020 Key Focus Areas - link
Competitors / Risks
Regulatory Risks: Regulatory antitrust scrutiny across the major internet giants like Facebook, Amazon, Apple, and Alphabet will likely continue following July’s Congress hearing. Changes in mobile operating platforms, notably the Apple iOS 14, could also impede ad targeting and weigh on ad pricing.
Other Social Networks: Facebook competes with many other broad platforms that replicate the same capabilities. For example, Apple in messaging, Google and YouTube in advertising and video, Tencent and Snap in messaging and social media, ByteDance and Twitter in social media, and Amazon in advertising. While Facebook has a longstanding history of launching products quickly to stay competitive, like its launch of Instagram stories to compete with Snap and recently launched Reels to compete with Tiktok, Facebook must continue staying competitive within its product roadmap to compete.
Key Questions to Ask Yourself (before we think you should buy...)
Has Facebook moved past its political and regulatory troubles or will this affect Facebook’s growth potential and stock?
The broader advertising industry is navigating unique challenges due to COVID - do you think Facebook will come out of this pandemic strong and continue delivering rapid top- and bottom-line growth over the long haul?
Do you believe that Facebook can continue growing its ad revenue and compete with other platforms, despite the competition?
Our Take
As the fifth most valuable company on the S&P 500 index, behind Apple (AAPL), Microsoft, Google stock and Amazon, we believe that Facebook has proven its ability to stay nimble and continue growth despite bad news or headlines. We think Facebook still has a long growth runway and continues to provide unmatched value to advertisers, and think Facebook is a good buy at this time.
Note this is not investment advice. Please consider doing your own research before making any investments!
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