Facebook Inc Earnings Model (O'Connor)
Author: Ashton O'Connor, Published: July 27, 2020 8:28pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: I expect the effects of the coronavirus pandemic on Facebook to last longer into the future than many analysts are predicting, with higher MAUs and significantly decreased ARPUs into 2021. I believe the increase in MAUs from shelter-in-place orders, an expected second spike during the winter, and increasing shift to remote work as a result of the pandemic will be offset by the advertising boycott, decreasing demand for advertising as companies cut expenditures during the pandemic and into the recession, and increasing investment and expenditure by Facebook.
I am predicting an increase in MAUs across all regions as the COVID-19 pandemic continues to keep people inside, especially as many countries are rolling back opening procedures due to resulting spikes in cases. I expect higher numbers in the US and Canada as many states have reopened far too quickly and the impacts of those actions have yet to be felt, especially as we begin to approach winter, where many pre-announced school closures and impeding company closures may increase usage once again. I also expect a significant increase in numbers in Asia-Pacific and the Rest of the World continuing into 2021 with Facebook's recent initiatives and partnership with JioSmart in India. I believe many analysts have understated the extent of this pandemic, and that the effects and the increase in MAUs will continue into 2021, and long after as many companies begin to transition their workforce to permanently remote after realizing its benefits when the pandemic ends, although slightly reduced per management's guidance.
I am forecasting a significant drop in ARPU for the next two quarters as the impact of many companies, including Walt Disney, the leading advertiser on Facebook for the first six months of 2020, withdraw ads from Facebook due to boycotts over hate speech and other content. This pullout of advertising revenue merely compounds a pre-existing trend of decreased ad spending as companies attempt to cut costs during the pandemic along with decreased advertising output simply from the incoming recession, which is why I am predicting a slight recovery with the boost of the holiday season, but with numbers continuing afterwards into 2201 lower YoY.
Due to Facebook's increased initiatives to trace the Coronavirus and help small businesses during the pandemic, such as their partnership with Carnegie Mellon, the creation of a COVID-19 information center, their partnership with JioSmart, and investment in hiring talent in product and engineering roles, I am predicting an uptick in R&D expense as a percent of revenue that will spike during Q2 and Q3 and trail off into 2021.
Additionally, the USD weakened against the Euro during Q2 which likely resulted in a slight decline in European ARPU. Per management guidance, gross margins will decrease to account for increased costs of revenue in the short term, and will begin to return back to normal into 2021.
This model estimates that Facebook’s revenues will be approximately $17.54 billion and EPS will be $1.25 for 2Q20.
I am predicting an increase in MAUs across all regions as the COVID-19 pandemic continues to keep people inside, especially as many countries are rolling back opening procedures due to resulting spikes in cases. I expect higher numbers in the US and Canada as many states have reopened far too quickly and the impacts of those actions have yet to be felt, especially as we begin to approach winter, where many pre-announced school closures and impeding company closures may increase usage once again. I also expect a significant increase in numbers in Asia-Pacific and the Rest of the World continuing into 2021 with Facebook's recent initiatives and partnership with JioSmart in India. I believe many analysts have understated the extent of this pandemic, and that the effects and the increase in MAUs will continue into 2021, and long after as many companies begin to transition their workforce to permanently remote after realizing its benefits when the pandemic ends, although slightly reduced per management's guidance.
I am forecasting a significant drop in ARPU for the next two quarters as the impact of many companies, including Walt Disney, the leading advertiser on Facebook for the first six months of 2020, withdraw ads from Facebook due to boycotts over hate speech and other content. This pullout of advertising revenue merely compounds a pre-existing trend of decreased ad spending as companies attempt to cut costs during the pandemic along with decreased advertising output simply from the incoming recession, which is why I am predicting a slight recovery with the boost of the holiday season, but with numbers continuing afterwards into 2201 lower YoY.
Due to Facebook's increased initiatives to trace the Coronavirus and help small businesses during the pandemic, such as their partnership with Carnegie Mellon, the creation of a COVID-19 information center, their partnership with JioSmart, and investment in hiring talent in product and engineering roles, I am predicting an uptick in R&D expense as a percent of revenue that will spike during Q2 and Q3 and trail off into 2021.
Additionally, the USD weakened against the Euro during Q2 which likely resulted in a slight decline in European ARPU. Per management guidance, gross margins will decrease to account for increased costs of revenue in the short term, and will begin to return back to normal into 2021.
This model estimates that Facebook’s revenues will be approximately $17.54 billion and EPS will be $1.25 for 2Q20.
| |||
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.