Facebook Inc Earnings Model (Patel)
Author: Kavina Patel, Published: July 28, 2020 7:51pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: As Facebook reports their second-quarter earnings, I have made predictions for this year and next year. My model portrays that Facebook will pursue an aggressive financial business outline. Coronavirus has rapidly made its way across the globe and affected tens of millions of people all across the world. Throughout all of the pandemonium, one thing that has been seen is the change in people and in the global economy as well.
Mark Zuckerberg, CEO stated “there are now more than 3 billion people actively using Facebook, Instagram, WhatsApp, or Messenger each month. In places hardest hit by the virus, messaging volume has increased more than 50%, and voice and video calling has more than doubled across Messenger and WhatsApp.” Stay at home orders have been put into place and there is more leisure time than ever before for people to spend scrolling through social media. This, alongside the recent investment in Jio Platforms Limited, an Indian telecommunication company of 5 billion dollars, caused the number of monthly active users to rise. Since India has the most amount of active Facebook users compared to any other country, I increased the growth in monthly active users for Asia Pacific in the earnings model. Eventually, starting in 2021 I believe that as Coronavirus cases decrease, people will shift back to their normal routine, and the number of monthly active users will start to fall.
Although engagement with active users is high right now, the average revenue per user is declining due to a multitude of reasons. Many countries across the globe fell into an economic recession and unemployment rates have spiked up. The impact of the Coronavirus left many companies to forcefully shut down all on-site operations and they were left packing for the door. Therefore, those companies are not looking into doing much advertising at the moment. Recently, advertising boycotts have been taking place and putting a pause on Facebook advertisements from hate speeches. According to NBC News, more than 500 companies are participating in the #StopHateForProfit movement. Due to this, the company suffered a loss as its market value fell $56 billion. However, I believe that these companies will eventually continue doing advertisements. Coronavirus presence will decrease significantly, and employment rates will rise leading average revenue per user to increase in 2021.
"We expect our full-year 2020 tax rate will be in the high-teens, although we may see fluctuations in our quarterly rate depending on our financial results."
Management expects total expenses in 2020 to be between $52-56 billion, down from the prior range of $54-59 billion. My predictions yielded $53.2 billion in 2020 operating expenses. From the Quarter 1 earnings conference call, management says "We expect our full-year 2020 tax rate will be in the high-teens, although we may see fluctuations in our quarterly rate depending on our financial results." Using this advice, I forecasted the effective tax rate to be 17.6% in 2020. I don’t expect there to be large fluctuations in the effective tax rate.
In conclusion, I have a slightly more bullish outlook on Facebook’s future. Social media is a key catalyst in our current society and is so deeply integrated within our lives that it would be categorically inconceivable. And yes, social media companies may experience rollercoaster-like effects on their revenue, but historically companies will always need to market and they will always turn to a social media giant, such as Facebook, to use as their platform to send their message.
Mark Zuckerberg, CEO stated “there are now more than 3 billion people actively using Facebook, Instagram, WhatsApp, or Messenger each month. In places hardest hit by the virus, messaging volume has increased more than 50%, and voice and video calling has more than doubled across Messenger and WhatsApp.” Stay at home orders have been put into place and there is more leisure time than ever before for people to spend scrolling through social media. This, alongside the recent investment in Jio Platforms Limited, an Indian telecommunication company of 5 billion dollars, caused the number of monthly active users to rise. Since India has the most amount of active Facebook users compared to any other country, I increased the growth in monthly active users for Asia Pacific in the earnings model. Eventually, starting in 2021 I believe that as Coronavirus cases decrease, people will shift back to their normal routine, and the number of monthly active users will start to fall.
Although engagement with active users is high right now, the average revenue per user is declining due to a multitude of reasons. Many countries across the globe fell into an economic recession and unemployment rates have spiked up. The impact of the Coronavirus left many companies to forcefully shut down all on-site operations and they were left packing for the door. Therefore, those companies are not looking into doing much advertising at the moment. Recently, advertising boycotts have been taking place and putting a pause on Facebook advertisements from hate speeches. According to NBC News, more than 500 companies are participating in the #StopHateForProfit movement. Due to this, the company suffered a loss as its market value fell $56 billion. However, I believe that these companies will eventually continue doing advertisements. Coronavirus presence will decrease significantly, and employment rates will rise leading average revenue per user to increase in 2021.
"We expect our full-year 2020 tax rate will be in the high-teens, although we may see fluctuations in our quarterly rate depending on our financial results."
Management expects total expenses in 2020 to be between $52-56 billion, down from the prior range of $54-59 billion. My predictions yielded $53.2 billion in 2020 operating expenses. From the Quarter 1 earnings conference call, management says "We expect our full-year 2020 tax rate will be in the high-teens, although we may see fluctuations in our quarterly rate depending on our financial results." Using this advice, I forecasted the effective tax rate to be 17.6% in 2020. I don’t expect there to be large fluctuations in the effective tax rate.
In conclusion, I have a slightly more bullish outlook on Facebook’s future. Social media is a key catalyst in our current society and is so deeply integrated within our lives that it would be categorically inconceivable. And yes, social media companies may experience rollercoaster-like effects on their revenue, but historically companies will always need to market and they will always turn to a social media giant, such as Facebook, to use as their platform to send their message.
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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.