Facebook Inc Earnings Model (Nandakumar)
Author: Gautham Nandakumar, Published: July 28, 2020 8:11pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: In this model, I am forecasting the effects that the COVID-19 virus has on Facebook’s current and future financials by using historical data and contemporary events to predict each data point accurately. The financial data in my model portray Facebook as a neutral company. Since the first quarter of 2020, many businesses have been forced to declare to file bankruptcy due to the countless amount of restrictions from the virus. I believe that restrictions such as stay at home orders and bans will prevail for at least the next three quarters. It is relatively hard to forecast future financial data due to the varying uncertainties presented by COVID-19.
The two primary metrics that constitute this model are Monthly Active Users (MAUs) and Average Revenue Per User (ARPU). In assessing a technology company like Facebook, it is essential to look at user data because these are constantly changing key performance indicators, which help to understand user monetization. Between 2019 and the first quarter of 2020, there was a considerable increase in monthly active users. Monthly active users will continually increase until 2021 because, since quarantine, many people are unemployed and have more leisure time. In the second quarter, however, there is a slight decrease in MAUs due to the temporary lift of coronavirus restrictions. Many experts are predicting a second wave of COVID-19 between the 3rd and 4th quarters, so there will again be an increase in unemployment, followed by an increase in MAUs. The MAUs rate is different for each part of the world. North America and Europe face a slow recovery and possible economic downturn in the next two quarters, so both the MAUs and ARPUs will slowly increase. However, Asia is set to recover much faster than the rest of the world due to the early lift of restrictions. Asia also has the highest Facebook userbase, with about 51% of the total world population using the application. In addition to this, the Facebook and JIO deal in India will significantly increase the number of monthly active users and average revenue. Despite this fact, 2020 presents an overall slow growth in Average Revenue Per User due to the decrease in Facebook advertisements. There has been a substantial decrease in ad revenue due to less economic activity from the shutdowns in various parts of the globe. It is predicted that 2021 will present a gradual reduction in the MAUs as the restrictions will be lifted, but the average revenue per user will progressively increase since there will be more economic activity. There will be a higher demand for advertisements, but there is one fact that should be considered. Recently, there have been many advertising boycotts against Facebook, and many companies are cutting a significant amount of advertisement spending from Facebook. Facebook will need to increase marketing expenses in 2021 because Facebook will have a much higher customer acquisition cost. Operating costs will significantly increase quarter by quarter in 2021 for this reason. Although there is a possibility for a decrease in overall ad revenue, I believe that the transformation from the current situation to one with full economic activity (2021) will offset this problem.
The periodical fluctuations in the operating expenses also affect the earnings per share and the repurchased shares. Shares repurchased reduces the number of shares available, thus increasing the value of each share [Earnings Per Share (EPS)]. In the current situation, I believe that the shares repurchased will decrease for the remaining quarters in 2020. In the first quarter, there were not as many restrictions enforced, but now it is tough for the company to buy back shares due to various requirements. Shares repurchased will drastically reduce from the first quarter to the second quarter, and slightly reduce from the second quarter to the fourth quarter. The average share repurchase price is $196.47, which is lower than the $230 per share estimate. The share repurchase amount in the period will decline by about 29.6% in 2020 but will gradually increase by about 43.8% in 2021. The EPS will fluctuate throughout the period, with both increases and decreases, but for the second quarter of 2020, there will be a significant drop in the EPS from 1.71 to approximately 1.27. The EPS will increase in 2021 as there will be more shares repurchased, but will also decrease at times. Finally, I predict that revenue will be $17.2 billion (an increase from original estimates) for the second quarter of 2020 and about $78.4 billion by the end of the year. In 2021, revenues will increase but will be less than the consensus estimates, due to the rising customer acquisition costs.
The two primary metrics that constitute this model are Monthly Active Users (MAUs) and Average Revenue Per User (ARPU). In assessing a technology company like Facebook, it is essential to look at user data because these are constantly changing key performance indicators, which help to understand user monetization. Between 2019 and the first quarter of 2020, there was a considerable increase in monthly active users. Monthly active users will continually increase until 2021 because, since quarantine, many people are unemployed and have more leisure time. In the second quarter, however, there is a slight decrease in MAUs due to the temporary lift of coronavirus restrictions. Many experts are predicting a second wave of COVID-19 between the 3rd and 4th quarters, so there will again be an increase in unemployment, followed by an increase in MAUs. The MAUs rate is different for each part of the world. North America and Europe face a slow recovery and possible economic downturn in the next two quarters, so both the MAUs and ARPUs will slowly increase. However, Asia is set to recover much faster than the rest of the world due to the early lift of restrictions. Asia also has the highest Facebook userbase, with about 51% of the total world population using the application. In addition to this, the Facebook and JIO deal in India will significantly increase the number of monthly active users and average revenue. Despite this fact, 2020 presents an overall slow growth in Average Revenue Per User due to the decrease in Facebook advertisements. There has been a substantial decrease in ad revenue due to less economic activity from the shutdowns in various parts of the globe. It is predicted that 2021 will present a gradual reduction in the MAUs as the restrictions will be lifted, but the average revenue per user will progressively increase since there will be more economic activity. There will be a higher demand for advertisements, but there is one fact that should be considered. Recently, there have been many advertising boycotts against Facebook, and many companies are cutting a significant amount of advertisement spending from Facebook. Facebook will need to increase marketing expenses in 2021 because Facebook will have a much higher customer acquisition cost. Operating costs will significantly increase quarter by quarter in 2021 for this reason. Although there is a possibility for a decrease in overall ad revenue, I believe that the transformation from the current situation to one with full economic activity (2021) will offset this problem.
The periodical fluctuations in the operating expenses also affect the earnings per share and the repurchased shares. Shares repurchased reduces the number of shares available, thus increasing the value of each share [Earnings Per Share (EPS)]. In the current situation, I believe that the shares repurchased will decrease for the remaining quarters in 2020. In the first quarter, there were not as many restrictions enforced, but now it is tough for the company to buy back shares due to various requirements. Shares repurchased will drastically reduce from the first quarter to the second quarter, and slightly reduce from the second quarter to the fourth quarter. The average share repurchase price is $196.47, which is lower than the $230 per share estimate. The share repurchase amount in the period will decline by about 29.6% in 2020 but will gradually increase by about 43.8% in 2021. The EPS will fluctuate throughout the period, with both increases and decreases, but for the second quarter of 2020, there will be a significant drop in the EPS from 1.71 to approximately 1.27. The EPS will increase in 2021 as there will be more shares repurchased, but will also decrease at times. Finally, I predict that revenue will be $17.2 billion (an increase from original estimates) for the second quarter of 2020 and about $78.4 billion by the end of the year. In 2021, revenues will increase but will be less than the consensus estimates, due to the rising customer acquisition costs.
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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.