A Rocky Road Ahead for Facebook and the Broader Economy
Author: Owen Carney, Published: July 21, 2020 12:31pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Facebook (NASDAQ: FB) is scheduled to release earnings for 2Q20 on July 29th at 5:00 PM EST. The consensus expects revenue to fall by 3.03% to $17.2 billion and calls for an EPS of $1.37, which translates to a QoQ decrease of 19.71%. The consensus projects a quick recovery in the third and fourth quarters with revenues totaling $18.9 billion and $23.5 billion along with an EPS of $1.70 and $2.47, respectively. At the end of the fiscal year, analysts predict that Facebook will report revenues exceeding $77 billion.
As for management guidance on 2Q20, these are the key takeaways:
In light of Goldman Sachs’s recent downgrade of US GDP in 2Q20—with which the advertising industry’s output is highly correlated—and that advertisers are decreasing ad spending due to the current sociopolitical environment and cost savings for firms, Facebook’s revenues will likely be hampered until mid-2021. This model assumes that a vaccine will be available next year and that the holiday season will accelerate ad spending and economic output. With that said, these are the assumptions:
As for management guidance on 2Q20, these are the key takeaways:
- There was a material reduction in the demand for advertising and a decline in ad prices over the last three weeks of 1Q20, which may materially and adversely affect operations for the rest of the year.
- The company intends to invest more in its data centers, network infrastructure, and office facilities and wants to scale its headcount to support growth as well as certain community initiatives surrounding the COVID-19 pandemic.
- Mark Zuckerberg has stated that the company is willing to take on lower margins in the near-term but would like to increase them in the future.
- Management has avoided providing any direct guidance on revenue projections but anticipates an effective tax rate in the high-teens and that total operating expenses will range from $52 to $56 billion.
In light of Goldman Sachs’s recent downgrade of US GDP in 2Q20—with which the advertising industry’s output is highly correlated—and that advertisers are decreasing ad spending due to the current sociopolitical environment and cost savings for firms, Facebook’s revenues will likely be hampered until mid-2021. This model assumes that a vaccine will be available next year and that the holiday season will accelerate ad spending and economic output. With that said, these are the assumptions:
- Monthly Active Users (MAUs): With more people staying indoors due to heavy restrictions in 2Q20, Facebook will see an uptick in MAUs, with the most growth occurring in Asia-Pacific and Rest of World. After authorities lift restrictions during the summer season, there will be a slight decrease in MAUs as people spend more time outdoors, before increasing once again due to a secondary outbreak. The growth rate for MAUs will revert to its mean by the end of 2021.
- Average Revenue Per User (ARPU): As more firms minimize their costs to increase cash or participate in the advertising boycotts, there will be a decline in ARPU—especially in regions outside of the US and Canada—but will decrease at a decreasing rate due to the holiday season, before finally stabilizing toward the end of 2021.
- Gross Margins and Operating Expenses: Per management guidance, gross margins will progressively decrease to account for the increased costs of revenue, and operating expenses will rise slightly because of a higher headcount and other investments. Overall, total operating expenses will be at the mid-point of guidance.
- Other Line Items: Interest and Income Expense as well as any changes in share count or non-GAAP adjustments are projected using an average of the last four quarters, whereas the share repurchase prices remain constant at $220 per share.
- Revenue and EPS: This model estimates that Facebook’s revenues and EPS for 2Q20 will be approximately $17.5 billion and $1.50, respectively. These estimates are higher than those of consensus. However, the proceeding estimates are far below consensus. Revenues and EPS for 3Q20 are $17.9 billion and $1.45, respectively. Finally, revenues and EPS for 4Q20 are $21.3 billion and $1.63, respectively.
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Disclosure of Potential Conflicts of Interest: The author of this article/model has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in the content represent the author’s opinions.