Facebook Inc Earnings Model (Chintawar)
Author: Vedant Chintawar, Published: July 19, 2020 12:56am, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: As Facebook looks to publish its second-quarter earnings report, I have forecasted my predictions for the company’s performance for the remainder of the year as well as next year. During these unprecedented times, it is challenging to predict how companies will fare. Monthly Average Users (MAUs) for Facebook has been increasing at a constant pace globally for over a year. Due to the coronavirus and stay-at-home orders, I expect more people to be spending time on social media than in past years. This will result in a higher Year-over-year growth rate of MAUs in the short-term. By the beginning of 2021, I predict lockdown restrictions to loosen enough that the growth of Facebook monthly active users will decrease. David Wehner, CFO of Facebook, said “[w]e do think that as shelter-in-place restrictions lift, and we return to a more normal cadence, that we're going to lose some of this engagement.”I still expect growth, but very minimal throughout 2021.
Average Revenue Per User is currently in the midst of a slump. This is due to less companies looking to advertise on Facebook, once again, due to coronavirus and lockdown restrictions. Advertisements that are still up are lacking in performance and ad revenue consequently has taken a hit. I expect this low period to continue until at least the end of the calendar year. At some point during 2021, companies will begin to advertise and generate revenue for Facebook again. Pertaining to both ARPU and MAU, Facebook has recently invested over $5 billion in Jio, a telecommunications company in India. This deal will allow Facebook and its family of apps to grow their presence in India, with a primary focus on small businesses. In turn, this will lead to more active users and a larger opportunity for revenue for Facebook and small businesses. Management provided an estimate of their 2020 total operating expenses: “As a result, we expect total expenses in 2020 to be between $52-56 billion, down from the prior range of $54-59 billion.” I used this approximation and prior patterns to determine gross margins and expenses as a percentage of revenue. A large corporation like Facebook is surely able to effectively manage their operating expenses. Quarterly data from 2019 shows that percentages decrease or stay fairly stagnant, and I expect these trends to continue. My predictions yielded $54.8 billion in 2020 operating expenses.
Management also reported that the effective tax rate for the year would be “in the high-teens”. For this reason, I forecasted the quarterly tax rate to be around 17-18%, ending with 17.6% on the year. The change in shares has been minimal and shows very little deviation from 0. I don’t expect there to be a big increase or decrease so I have forecasted very small change until the end of 2021 for basic shares and diluted shares. I expect the stock price to gradually increase throughout the next two years as well so there is a moderate increase forecasted up to just under $300 per share. Around the beginning of the year, Facebook authorized another $10 billion for the stock buyback program. However, it is highly unlikely that all of this money is actually spent on buyback, and repurchase will likely stay around $1.4 to 1.6 billion each quarter. In previous years, Q1 repurchase has been the lowest in the year so I’ve used this trend to produce my predictions. Most of the effects of foreign exchange come from the European market. For this reason, revenue affected by FX was accounted for using trends of the exchange rate from past years. Share-based compensation numbers are likely to stay stagnant throughout 2020. I have forecasted very little fluctuation in SBC included in the cost of revenue, R&D expenses, marketing and sales expenses, and G&A expenses until the end of Q4 2021.
Overall, my opinion on Facebook’s short-term future is fairly bullish. I have forecasted a moderately large increase in revenue and EPS for 2021. While the coronavirus pandemic caused a hindrance to the company in the first quarter, I believe Facebook will be able to rebound and progress forward using its prevalence and family of products. I would expect Facebook to continue to be investable, ideal of a strong, global company.
Average Revenue Per User is currently in the midst of a slump. This is due to less companies looking to advertise on Facebook, once again, due to coronavirus and lockdown restrictions. Advertisements that are still up are lacking in performance and ad revenue consequently has taken a hit. I expect this low period to continue until at least the end of the calendar year. At some point during 2021, companies will begin to advertise and generate revenue for Facebook again. Pertaining to both ARPU and MAU, Facebook has recently invested over $5 billion in Jio, a telecommunications company in India. This deal will allow Facebook and its family of apps to grow their presence in India, with a primary focus on small businesses. In turn, this will lead to more active users and a larger opportunity for revenue for Facebook and small businesses. Management provided an estimate of their 2020 total operating expenses: “As a result, we expect total expenses in 2020 to be between $52-56 billion, down from the prior range of $54-59 billion.” I used this approximation and prior patterns to determine gross margins and expenses as a percentage of revenue. A large corporation like Facebook is surely able to effectively manage their operating expenses. Quarterly data from 2019 shows that percentages decrease or stay fairly stagnant, and I expect these trends to continue. My predictions yielded $54.8 billion in 2020 operating expenses.
Management also reported that the effective tax rate for the year would be “in the high-teens”. For this reason, I forecasted the quarterly tax rate to be around 17-18%, ending with 17.6% on the year. The change in shares has been minimal and shows very little deviation from 0. I don’t expect there to be a big increase or decrease so I have forecasted very small change until the end of 2021 for basic shares and diluted shares. I expect the stock price to gradually increase throughout the next two years as well so there is a moderate increase forecasted up to just under $300 per share. Around the beginning of the year, Facebook authorized another $10 billion for the stock buyback program. However, it is highly unlikely that all of this money is actually spent on buyback, and repurchase will likely stay around $1.4 to 1.6 billion each quarter. In previous years, Q1 repurchase has been the lowest in the year so I’ve used this trend to produce my predictions. Most of the effects of foreign exchange come from the European market. For this reason, revenue affected by FX was accounted for using trends of the exchange rate from past years. Share-based compensation numbers are likely to stay stagnant throughout 2020. I have forecasted very little fluctuation in SBC included in the cost of revenue, R&D expenses, marketing and sales expenses, and G&A expenses until the end of Q4 2021.
Overall, my opinion on Facebook’s short-term future is fairly bullish. I have forecasted a moderately large increase in revenue and EPS for 2021. While the coronavirus pandemic caused a hindrance to the company in the first quarter, I believe Facebook will be able to rebound and progress forward using its prevalence and family of products. I would expect Facebook to continue to be investable, ideal of a strong, global company.
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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.