Facebook Inc Earnings Model (Aryan Khonde)
Author: Aryan Khonde, Published: July 19, 2020 11:02am, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: Strong increase in monthly active users in all of Facebook's global markets will propel them to have a substantial increase in revenues for the years 2020 and 2021. The impact of COVID-19 is the main driver of growth in the monthly active users segment for Facebook. While, some markets such as the Asia Pacific region have reopened their economy leading to the increase in active users to be marginalized; India, one of Facebook's largest markets, still remains not fully reopened and thus it will be one the main reasons that Facebook will experience growth in the Asia Pacific region for the year 2020. The other global markets such as US and Canada & Europe will see an uptick in monthly active users concentrated in the Q2 and Q3 before going down to stable levels in Q4 and beyond. The same rationale applied to the Facebook's North American and European markets can be applied to the rest of the world as the uptick in COVID-19 cases will cause lock-downs causing an increase in users logging onto to Facebook during Q2 and Q3 and will stabilize once the virus gets under control.
The continued trend in strong growth of monthly active users will be most apparent in the Asia Pacific Region for the year 2021 as Facebook will launch new products such as Instagram Reels which will take the place of platforms such as TikTok especially in India after India banned TikTok in June 2020. This model also works under the assumption that one of Facebook's main competitors, TikTok, will get banned in key markets such as England, Australia, and America due to political headwinds and the concern over TikTok being used as a surveillance apparatus.
The undercutting of one of Facebook's main rivals will lead to an increase in monthly active users and also Average Revenue per User (ARPU) as more companies will shift to Facebook to target young millennials in 2021. For the ARPU, due to economies closing down in all global markets in Q2 and Q3 there will be a substanial decrease in year over year (YoY) growth in ARPU as advertisers will be less inclined to spend on Facebook ads if they know that consumers will be curtailed to their homes. However, under the assumption that the lockdowns will be lifted by Q4 then ARPU will rebound to prior years levels and continue to climb to strong levels in 2021. YoY growth in ARPU will be higher in the Asia Pacific Region for the year 2020 as the lockdowns have been lifted in most Southeast Asian countries. The year 2021 will be a strong year for Facebook in terms of YoY growth in ARPU for all markets as the lockdowns will be lifted and consumers will have a lot of pent up spending power as they did not get to spend much money in 2020. This will lead for more ads to be targeted at consumers.
Political pressure has lead to some companies to boycott Facebook ads but the impact of those boycotts will be minimal to Facebook's ad revenues and Facebook will try to change their platform in order to stop hate speech through indirect measures such as denoting when an ad is political or untrustworthy. However, Facebook will try to quell the boycotts through favorable marketing exposure leading them to increase marketing expenses as a percentage of revenue in Q2 and Q3 to 18% and 17% , respectively, while decreasing R&D expenses to make up for the increased marketing expenses. However, this will only be the case for Q2 and Q3 and will not be a problem for later quarters. As for shares repurchases and the average price in share price repurchases, Facebook will take advantage of the decline in the price of the stock and will increase increase the shares repurchased in Q2 of 2020 to $1,860 billion.
The continued trend in strong growth of monthly active users will be most apparent in the Asia Pacific Region for the year 2021 as Facebook will launch new products such as Instagram Reels which will take the place of platforms such as TikTok especially in India after India banned TikTok in June 2020. This model also works under the assumption that one of Facebook's main competitors, TikTok, will get banned in key markets such as England, Australia, and America due to political headwinds and the concern over TikTok being used as a surveillance apparatus.
The undercutting of one of Facebook's main rivals will lead to an increase in monthly active users and also Average Revenue per User (ARPU) as more companies will shift to Facebook to target young millennials in 2021. For the ARPU, due to economies closing down in all global markets in Q2 and Q3 there will be a substanial decrease in year over year (YoY) growth in ARPU as advertisers will be less inclined to spend on Facebook ads if they know that consumers will be curtailed to their homes. However, under the assumption that the lockdowns will be lifted by Q4 then ARPU will rebound to prior years levels and continue to climb to strong levels in 2021. YoY growth in ARPU will be higher in the Asia Pacific Region for the year 2020 as the lockdowns have been lifted in most Southeast Asian countries. The year 2021 will be a strong year for Facebook in terms of YoY growth in ARPU for all markets as the lockdowns will be lifted and consumers will have a lot of pent up spending power as they did not get to spend much money in 2020. This will lead for more ads to be targeted at consumers.
Political pressure has lead to some companies to boycott Facebook ads but the impact of those boycotts will be minimal to Facebook's ad revenues and Facebook will try to change their platform in order to stop hate speech through indirect measures such as denoting when an ad is political or untrustworthy. However, Facebook will try to quell the boycotts through favorable marketing exposure leading them to increase marketing expenses as a percentage of revenue in Q2 and Q3 to 18% and 17% , respectively, while decreasing R&D expenses to make up for the increased marketing expenses. However, this will only be the case for Q2 and Q3 and will not be a problem for later quarters. As for shares repurchases and the average price in share price repurchases, Facebook will take advantage of the decline in the price of the stock and will increase increase the shares repurchased in Q2 of 2020 to $1,860 billion.
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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.