Facebook Inc Earnings Model (Gupta)
Author: Karan Gupta, Published: July 27, 2020 9:30pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Facebook is the largest social network in the world, with more than 2 billion monthly active users. The growth in users and user engagement, along with the valuable data that they generate, makes Facebook attractive to advertisers in the short and long term. The combination of these valuable assets and expected continuing growth in online advertising are well for Facebook, as the firm generates strong top-line growth and remains cash flow positive and profitable.
Digital Advertising (2020): Due to Facebook’s large consumer base, Facebook is poised to have stable future growth in
advertising revenue.
E-Commerce Initiatives (2020): Initiatives such as Facebook Pay and Instagram Shopping allow for convenient forms of payment
drawing attraction from digital advertisers.
Facebook is not only reaping the benefits from a push towards digital advertising, but also using e-commerce initiatives to draw marketers to use their platforms. Initiatives such as Facebook Pay, and Instagram Shopping are attracting marketers due to the user friendliness and
convenience. Other programs such as WhatsApp Business are set to attract more international revenue as businesses in countries like India and Brazil rely upon the app as the only source of e-commerce.
Gaming and VR (2020): Because Facebook is acquiring smaller companies. Facebook’s early shift into virtual reality and gaming will help it stand out among its competitors.
Facebook’s stake in Jio Reliance in India will strengthen a further international presence in emerging markets.
My response to the coronavirus: With large segments of the global economy pretty much shut down (airlines, hotels, retailers, auto makers, restaurants, casinos, film and entertainment, etc.) there is little reason for these companies to advertise. Companies are also, if advertising at all, not spending money getting into bidding wars for advertisements on the same platform. There is no need for companies greatly affected by the coronavirus to get into a bid war on advertising space if their operations are stalled anyways. However, social networking sites are seeing a surge in traffic since the coronavirus has started. Mark Zuckerberg has stated that recent traffic on Facebook is “well beyond” the rise the company normally registers on New Year’s Eve. Total messaging across the platform has increased 50% in countries affected by the coronavirus. Daily video messaging and calls has doubled on both WhatsApp and Messenger. It is unclear how the market will react to a
surge in traffic and how much that will offset losses in digital advertising revenue (probably won’t do much). WhatsApp wasn’t being monetized at all over the past 6 years and now Facebook has the opportunity to earn significant amounts of revenue from the platform. Since traditional retailers are essentially on hiatus for the time being, e-commerce platforms like WhatsApp Business are going to be the only form of shopping in many emerging markets. In markets like India, WhatsApp is the internet, and consumers are going to turn to WhatsApp Business to shop for essential and nonessential goods. With increased traffic, businesses are going to have to turn to the WhatsApp Business API to automate responses to a surge in traffic and messages. Businesses have to pay for the features used in the API which will increase revenue for Facebook. Gaming has also surged during the coronavirus. While Facebook Gaming hasn't released official numbers, streaming is up 10% on twitch. Both of these catalysts are projected to take effect this year which will hopefully offset losses in digital advertising.
Digital Advertising (2020): Due to Facebook’s large consumer base, Facebook is poised to have stable future growth in
advertising revenue.
E-Commerce Initiatives (2020): Initiatives such as Facebook Pay and Instagram Shopping allow for convenient forms of payment
drawing attraction from digital advertisers.
Facebook is not only reaping the benefits from a push towards digital advertising, but also using e-commerce initiatives to draw marketers to use their platforms. Initiatives such as Facebook Pay, and Instagram Shopping are attracting marketers due to the user friendliness and
convenience. Other programs such as WhatsApp Business are set to attract more international revenue as businesses in countries like India and Brazil rely upon the app as the only source of e-commerce.
Gaming and VR (2020): Because Facebook is acquiring smaller companies. Facebook’s early shift into virtual reality and gaming will help it stand out among its competitors.
Facebook’s stake in Jio Reliance in India will strengthen a further international presence in emerging markets.
My response to the coronavirus: With large segments of the global economy pretty much shut down (airlines, hotels, retailers, auto makers, restaurants, casinos, film and entertainment, etc.) there is little reason for these companies to advertise. Companies are also, if advertising at all, not spending money getting into bidding wars for advertisements on the same platform. There is no need for companies greatly affected by the coronavirus to get into a bid war on advertising space if their operations are stalled anyways. However, social networking sites are seeing a surge in traffic since the coronavirus has started. Mark Zuckerberg has stated that recent traffic on Facebook is “well beyond” the rise the company normally registers on New Year’s Eve. Total messaging across the platform has increased 50% in countries affected by the coronavirus. Daily video messaging and calls has doubled on both WhatsApp and Messenger. It is unclear how the market will react to a
surge in traffic and how much that will offset losses in digital advertising revenue (probably won’t do much). WhatsApp wasn’t being monetized at all over the past 6 years and now Facebook has the opportunity to earn significant amounts of revenue from the platform. Since traditional retailers are essentially on hiatus for the time being, e-commerce platforms like WhatsApp Business are going to be the only form of shopping in many emerging markets. In markets like India, WhatsApp is the internet, and consumers are going to turn to WhatsApp Business to shop for essential and nonessential goods. With increased traffic, businesses are going to have to turn to the WhatsApp Business API to automate responses to a surge in traffic and messages. Businesses have to pay for the features used in the API which will increase revenue for Facebook. Gaming has also surged during the coronavirus. While Facebook Gaming hasn't released official numbers, streaming is up 10% on twitch. Both of these catalysts are projected to take effect this year which will hopefully offset losses in digital advertising.
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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.