Facebook Inc Earnings Model (Pathak)
Author: Yoganand Pathak, Published: July 28, 2020 5:48pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: My model forecasts Facebook’s revenue and earnings per share from the second quarter of 2020 through the end of the 2021 fiscal year. The earnings forecast is based upon my predicted shifts in Facebook’s monthly active users (MAU) and average revenue generated per user (ARPU) across the different regions. The operating expenses are modeled according to management’s guidance for the upcoming quarter and kept consistent with previous years for quarters beyond that. I have a very favorable view of Facebook and expect it to grow in revenue despite headwinds such as covid-19, less-directed advertisements, and ad-boycotts. I believe that the strong user growth due to the pandemic, global economies reopening, and Facebook’s status as the premier advertising platform will help offset those headwinds and continue growth.
Facebook saw significant growth in the first quarter (4% YoY compared to 1% in 2019) in monthly average users (MAU) due to stay-at-home orders enforced all over the world. These orders were mostly in place at the beginning of the second quarter and were slowly lifted with precaution over the quarter. However, I don’t expect any drop-off in users compared to the first quarter as people are continuing to spend time indoors due to the needed precautions. Moreover, in large markets like the United States and India, where cases have begun to resurge, are seeing slower reopenings resulting in more people staying indoors and online. In the first quarter earnings call, management noted that they are working on retaining users that have come back to Facebook due to the pandemic, and consequently I expect Facebook to retain these users even after the pandemic.
Another factor which can impact Facebook’s user base is TikTok, a Chinese social media platform which has exploded in popularity. Even though TikTok can be seen as a platform that could take away users from Facebook in the future, I believe that the uncertainty around TikTok will shift its users towards Facebook’s offerings. The U.S. government has considered banning TikTok due to privacy issues, and India actually banned the app. Facebook has begun launching Reels, its competition to TikTok, which will be on hosted on its family of apps. I believe creators will move to this platform due to the stability that its parent company, Facebook, offers, and will bring their fans with them. Consequently, I expect it to continue increasing user engagement.
Facebook does face significant headwinds with respect to ad revenue. The short-term being revenue lost due to the pandemic and ensuing shutdowns. Ads are selling at much lower prices due to the lack of demand. I forecasted this impact to slowly alleviate in the European region starting in the second quarter where shutdowns have been lifted and the travel industry is coming back. However, the United States will take longer, and I expect revenue growth rates (YoY) to continue reducing in the upcoming quarters.
From a long-term perspective, new data privacy concerns have resulted in limited third-party access to user preferences. This will result in less directed advertisements which reduces Facebook ads’ efficiency making them less attractive. This probably will have a noticeable impact on revenue due to reduced demand which will become more observable as the pandemic wears out.
Lastly, Facebook made a $5.7 billion investment into Jio Mart which will connect small, local business virtually to customers throughout India. Jio Mart is a very interesting opportunity for WhatsApp, as the messaging app will essentially serve as the marketplace where customers and businesses can buy and sell to each other directly. Most importantly, it can help Facebook finally monetize WhatsApp, and, further down the line, Messenger. Facebook can charge businesses for serving as an online store for their customers and completing their transactions through WhatsApp pay. If this idea is successful in India, it has potential of being implemented in other business regions through WhatsApp, Messenger, and Instagram. China has a similar service with WeChat, and people are going increasingly cashless in favor of WeChat pay. A similar change could result in significant revenue from WhatsApp and offset losses due to lowered ad-demand. Consequently, I expect APRU post-pandemic to continue increasing at rates close to previous years.
Facebook saw significant growth in the first quarter (4% YoY compared to 1% in 2019) in monthly average users (MAU) due to stay-at-home orders enforced all over the world. These orders were mostly in place at the beginning of the second quarter and were slowly lifted with precaution over the quarter. However, I don’t expect any drop-off in users compared to the first quarter as people are continuing to spend time indoors due to the needed precautions. Moreover, in large markets like the United States and India, where cases have begun to resurge, are seeing slower reopenings resulting in more people staying indoors and online. In the first quarter earnings call, management noted that they are working on retaining users that have come back to Facebook due to the pandemic, and consequently I expect Facebook to retain these users even after the pandemic.
Another factor which can impact Facebook’s user base is TikTok, a Chinese social media platform which has exploded in popularity. Even though TikTok can be seen as a platform that could take away users from Facebook in the future, I believe that the uncertainty around TikTok will shift its users towards Facebook’s offerings. The U.S. government has considered banning TikTok due to privacy issues, and India actually banned the app. Facebook has begun launching Reels, its competition to TikTok, which will be on hosted on its family of apps. I believe creators will move to this platform due to the stability that its parent company, Facebook, offers, and will bring their fans with them. Consequently, I expect it to continue increasing user engagement.
Facebook does face significant headwinds with respect to ad revenue. The short-term being revenue lost due to the pandemic and ensuing shutdowns. Ads are selling at much lower prices due to the lack of demand. I forecasted this impact to slowly alleviate in the European region starting in the second quarter where shutdowns have been lifted and the travel industry is coming back. However, the United States will take longer, and I expect revenue growth rates (YoY) to continue reducing in the upcoming quarters.
From a long-term perspective, new data privacy concerns have resulted in limited third-party access to user preferences. This will result in less directed advertisements which reduces Facebook ads’ efficiency making them less attractive. This probably will have a noticeable impact on revenue due to reduced demand which will become more observable as the pandemic wears out.
Lastly, Facebook made a $5.7 billion investment into Jio Mart which will connect small, local business virtually to customers throughout India. Jio Mart is a very interesting opportunity for WhatsApp, as the messaging app will essentially serve as the marketplace where customers and businesses can buy and sell to each other directly. Most importantly, it can help Facebook finally monetize WhatsApp, and, further down the line, Messenger. Facebook can charge businesses for serving as an online store for their customers and completing their transactions through WhatsApp pay. If this idea is successful in India, it has potential of being implemented in other business regions through WhatsApp, Messenger, and Instagram. China has a similar service with WeChat, and people are going increasingly cashless in favor of WeChat pay. A similar change could result in significant revenue from WhatsApp and offset losses due to lowered ad-demand. Consequently, I expect APRU post-pandemic to continue increasing at rates close to previous years.
| |||
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.