Facebook Inc Earnings Model (Vitenzon)
Author: Marc Vitenzon, Published: July 28, 2020 8:16pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: For fiscal quarter 2 in year 2020, a minor earnings beat of the consensus estimate for Facebook's EPS is expected. This expectation is largely driven by the assumption of smaller quarter-over-quarter (QoQ) drop-offs in average-revenue-per-user (ARPU), specifically in the U.S. and Canada, during the pandemic. ARPU in U.S. and Canada is projected to continue to marginally increase in Q2 and Q3 as a result of further expected fiscal stimulus and heightened user engagement as other forms of entertainment remain limited while social tensions are elevated. This means that this region should feel a negative impact when it comes to ARPU once fiscal stimulus begin to dry-up. However, this impact should be mitigated by revenues stemming from other regions which are expected to have had the pandemic under control for longer.
Elsewhere, ARPU is expected to decline QoQ as economic conditions continue to stagnate even as the virus comes under control in various parts of the EU and Asia.
The monthly-average-users (MAU) metrics are expected to face small drop-offs worldwide, as people begin to come out of the unprecedented period of stasis which existed in quarantine.
With regards to other aspects of this income-statement driven earnings model, the QoQ trends that have been set with 2020Q1 results are expected to continue--in-line with management's expectations expressed in the 2020Q1 earnings call. Increases in R&D expenses and interest expenses as a percentage of revenue are expected to remain the same, while marketing spend is expected to increase as Facebook aims up for this quarter's slack in MAUs from 2020Q1. Meanwhile, CapEx is expected to further decrease as Facebook pushes portions of it back to 2021H1. In the end, total expected OpEx for 2020 comes in at an expected $52,965B, which is at lower end of management's guidance between $52B and $56B.
The topical Facebook ad-boycott was given little weighting in the earnings forecast due to its limited effect on the company's bottom line, and the related-revenues are expected to be made back by the end of 2020 at the latest.
With regards to Facebook's long-term (3-5 years) picture, the current developments with the company's attempts to monetize WhatsApp in India via JioMart and the eventual mass consumption of VR content have been taken into account.
Given that both of the aforementioned developments are still very much in their nascent stages (in the context of the 3-5 year timeline), their effects are only expected to truly impact Facebook's revenue growth rate towards the later end of this five year period. Meanwhile, the digital advertising and social media market is expected to approach full saturation, with less and less market share up for grabs.
Thus, in the short term, Facebook is expected to beat earnings and eventually make a return to status quo by 2021H1. In this bullish model, Facebook returns to its pre-pandemic revenue growth of ~20% QoQ by the end of the year. In the long term, Facebook's growth profile seems significantly more limited, as its attempts to diversify revenue are still in their early stages of development.
Elsewhere, ARPU is expected to decline QoQ as economic conditions continue to stagnate even as the virus comes under control in various parts of the EU and Asia.
The monthly-average-users (MAU) metrics are expected to face small drop-offs worldwide, as people begin to come out of the unprecedented period of stasis which existed in quarantine.
With regards to other aspects of this income-statement driven earnings model, the QoQ trends that have been set with 2020Q1 results are expected to continue--in-line with management's expectations expressed in the 2020Q1 earnings call. Increases in R&D expenses and interest expenses as a percentage of revenue are expected to remain the same, while marketing spend is expected to increase as Facebook aims up for this quarter's slack in MAUs from 2020Q1. Meanwhile, CapEx is expected to further decrease as Facebook pushes portions of it back to 2021H1. In the end, total expected OpEx for 2020 comes in at an expected $52,965B, which is at lower end of management's guidance between $52B and $56B.
The topical Facebook ad-boycott was given little weighting in the earnings forecast due to its limited effect on the company's bottom line, and the related-revenues are expected to be made back by the end of 2020 at the latest.
With regards to Facebook's long-term (3-5 years) picture, the current developments with the company's attempts to monetize WhatsApp in India via JioMart and the eventual mass consumption of VR content have been taken into account.
Given that both of the aforementioned developments are still very much in their nascent stages (in the context of the 3-5 year timeline), their effects are only expected to truly impact Facebook's revenue growth rate towards the later end of this five year period. Meanwhile, the digital advertising and social media market is expected to approach full saturation, with less and less market share up for grabs.
Thus, in the short term, Facebook is expected to beat earnings and eventually make a return to status quo by 2021H1. In this bullish model, Facebook returns to its pre-pandemic revenue growth of ~20% QoQ by the end of the year. In the long term, Facebook's growth profile seems significantly more limited, as its attempts to diversify revenue are still in their early stages of development.
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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.