Facebook Inc Earnings Model (Dias)
Author: Carina Dias, Published: July 27, 2020 9:50pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Model Summary: Facebook’s ability to connect us to one another, especially during these unprecedented times, makes this company’s stock very valuable among investors right now. Overall, my views are bullish but a bit bearish in certain geographies. I have projected my Facebook earnings model to reflect a bull’s perspective on the company earnings throughout the next year. My assumptions stemmed from increasing the Monthly Active Users (MAUs) who lived in the U.S. and Canada (by averaging the 4 quarters and increasing it 5%, leading to an overall increase in 7%) as well as Europe (by averaging the 4 quarters and increasing it by 1%, leading to an overall increase in 5%). On the other hand, I slightly decreased the percentage of MAUs in the Asia Pacific (by averaging the 4 quarters and decreasing it by 4%, leading to an overall increase of 7% instead of an increase of 10%) and the rest of the world (by averaging the 4 quarters and decreasing it by 3%, leading to an overall increase of 6% instead of an increase of 8%). My reasons for increasing the MAUs in these regions are as follows — currently, the U.S. is facing a variety of social issues, ranging from the BLM protests to police funding and rights of the LGBTQ community. Along with this, ad revenue growth was the second strongest in the U.S. and Canada after the impacts of COVID-19 first launched, as stated in the Q1'20 FB Earnings Call Transcript. While I do believe that with the increase in people staying at home as a result of COVID-19 will result in a sky-rocketed usage in social media, I also understand that the social media usage differs based on the geography of the world. According to Statcounter Global Stats (1), in the last year, Facebook has been popularly used by 80.55% of users in Europe. The same goes for Canada, where Facebook takes the lead with 61.21% of users in Canada, as well as the U.S. where Facebook is used by 61.99% of users in America.
While Facebook is popular globally, as someone who has lived in the middle east, I feel as though there are a variety of other applications that are even more acceptably used over there, such as WhatsApp and specifically in India, Jio Platform, which is why I chose to decrease the MAUs of Facebook in these regions.
Looking at the bigger picture, I do believe that the Average Revenue Per User (APRU) would decrease in all regions. Specifically, I decreased the U.S. and Canada (by 1%), Europe (by 2%), Asia Pacific (by 1%), and the rest of the world (by 2%). As mentioned in the Q1'20 FB Earnings Call Transcript, some factors that contributed to the increase in demand for Facebook’s ad inventory include an increase in spending from existing marketers as well as an increase in the number of marketers actively advertising on their platform, all which was based on the quality, relevance and performance of those ads for the users who would be seeing them. The way I see it if there are more MAU’s scattered across the globe, that also means that there is a higher need for ad revenue. However, with the economic effects of this pandemic, I do not think that companies can afford to pay Facebook for these ads, resulting in a negative percentage of APRU as well as fewer ads being displayed because of this.
(1) https://gs.statcounter.com/social-media-stats/all/europe
While Facebook is popular globally, as someone who has lived in the middle east, I feel as though there are a variety of other applications that are even more acceptably used over there, such as WhatsApp and specifically in India, Jio Platform, which is why I chose to decrease the MAUs of Facebook in these regions.
Looking at the bigger picture, I do believe that the Average Revenue Per User (APRU) would decrease in all regions. Specifically, I decreased the U.S. and Canada (by 1%), Europe (by 2%), Asia Pacific (by 1%), and the rest of the world (by 2%). As mentioned in the Q1'20 FB Earnings Call Transcript, some factors that contributed to the increase in demand for Facebook’s ad inventory include an increase in spending from existing marketers as well as an increase in the number of marketers actively advertising on their platform, all which was based on the quality, relevance and performance of those ads for the users who would be seeing them. The way I see it if there are more MAU’s scattered across the globe, that also means that there is a higher need for ad revenue. However, with the economic effects of this pandemic, I do not think that companies can afford to pay Facebook for these ads, resulting in a negative percentage of APRU as well as fewer ads being displayed because of this.
(1) https://gs.statcounter.com/social-media-stats/all/europe
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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.