Facebook Inc Earnings Model (Razak)
Author: Afthab Razak, Published: July 28, 2020 5:55pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: This model represents Facebook as slightly bullish. The reason for this is run by a few major value drivers along with some recent setbacks for the company. In the age of COVID-19, daily and monthly Facebook users have surged due to everyone remaining at home, around the world. The pandemic is sending people to use Facebook’s social networking and messaging platforms more than ever, along with increases in accounts created and time spent using Facebook’s WhatsApp and Messenger. Facebook’s partnership with Jio is one of the greatest and most powerful investments that Facebook can make. This partnership will provide people in India access to digital tools they need to expand their current businesses and create new opportunities. Other tech giants, such as Google, Amazon, and Alibaba have also recognized that India is in the midst of an internet boom, and have been pumping billions into the country to propel India to digitalize, but Facebook is winning the war. Until now, the founder of Jio, Mukesh Ambani, has been influential in shaping India’s tech world, and now Facebook and Jio will enable e-commerce in rural India, surpassing Facebook’s goal of acquiring its next billion users. In the long run, this partnership could challenge the growth of FlipKart and Amazon and completely transform the way e-commerce functions in the world’s largest democracy. Overall, this new alliance has made investors very optimistic about Facebook and will lead to a large increase in earnings this quarter (Q2 2020) and in the long run.
Despite this surge in users and optimism for the future, Facebook has encountered some issues, particularly due to the lack of companies willing to advertise. About 96% of Facebook’s revenue comes from advertisers on the platform, but ad spending has been slashed in this quarter primarily because companies do not have enough money to spend on advertising. During the pandemic, numerous companies have gone bankrupt, several are in financial distress, and others are simply not in a position where they are willing to pour millions into marketing. A large portion of Facebook’s advertisers are small businesses who are at the most risk due to COVID-19 and these businesses have pulled back ad spend. Along with this, political pressure has led to several major companies boycotting Facebook ads, such as Starbucks, Adidas, and Coca-Cola. These companies have all released statements stating that they are pausing their advertising on Facebook until Facebook focuses on better practices and blocks hate speech and racist comments in order to prevent these messages from spreading. The impact from the boycott will definitely be devastating for Facebook, but it will be minimal to Facebook’s ad revenues.
Overall, this model is bullish on Facebook due to the surge in MAU this quarter resulting from people staying at home. This is believed to continue for the next few quarters until a vaccine is released to the public. Also, Facebook’s partnership with Jio is expected to significantly shape India’s tech world and will lead to hundreds of millions of people joining the platform. Although there are issues with ad spending and boycotts, these are short-term impacts that will be offset by Facebook’s achievements, goals, and progress over this quarter and in the long run.
Despite this surge in users and optimism for the future, Facebook has encountered some issues, particularly due to the lack of companies willing to advertise. About 96% of Facebook’s revenue comes from advertisers on the platform, but ad spending has been slashed in this quarter primarily because companies do not have enough money to spend on advertising. During the pandemic, numerous companies have gone bankrupt, several are in financial distress, and others are simply not in a position where they are willing to pour millions into marketing. A large portion of Facebook’s advertisers are small businesses who are at the most risk due to COVID-19 and these businesses have pulled back ad spend. Along with this, political pressure has led to several major companies boycotting Facebook ads, such as Starbucks, Adidas, and Coca-Cola. These companies have all released statements stating that they are pausing their advertising on Facebook until Facebook focuses on better practices and blocks hate speech and racist comments in order to prevent these messages from spreading. The impact from the boycott will definitely be devastating for Facebook, but it will be minimal to Facebook’s ad revenues.
Overall, this model is bullish on Facebook due to the surge in MAU this quarter resulting from people staying at home. This is believed to continue for the next few quarters until a vaccine is released to the public. Also, Facebook’s partnership with Jio is expected to significantly shape India’s tech world and will lead to hundreds of millions of people joining the platform. Although there are issues with ad spending and boycotts, these are short-term impacts that will be offset by Facebook’s achievements, goals, and progress over this quarter and in the long run.
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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.