Facebook Inc Earnings Model (Wen)
Author: Asher Wen, Published: July 28, 2020 7:47pm, Category: Earnings Preview (Prior to the 2Q2019 earnings release)
Summary of Model: As other companies are pulling their guidance, Facebook (FB) continues with its second-quarter earnings report. As the coronavirus epidemic progresses, there are concerns about the impact on large and small businesses alike. Recent events regarding multiple companies boycotting Facebook ads have introduced greater headwinds for this tech giant. Facebook announced a total ad revenue of $17.4 billion for Q1, a 17% year-over-year increase. The average price per ad decreased by 16% for Q1 as well. There is no doubt during this epidemic that ad revenue will reduce for Q2 and perhaps further quarters, but even with the strong headwinds, Facebook is much more resilient than it appears.
My model forecasts slight bearishness for Q3 and Q4, but overall ending in moderate bullishness as it progresses towards the end of 2021. Depending on how Facebook plays its cards with its core users and the businesses that it partners with, there could be strong growth during the year 2021. This is assuming that COVID-19 ends before the end of 2020. I primarily focus on two drivers for revenue guidance: Monthly Average Users (MAU) and Average Revenue Per User (ARPU).
As more and more countries undergo lockdown, the average time spent online on social media sites increases. Facebook has seen increased engagement of people on its site, especially with its video calling platform. It is also important to note that as fast as MAU increases, it can also decrease just as fast when COVID-19 restrictions lift around the globe. I believe that the Q2 MAU growth will be of a similar growth of Q1, reflecting a continued MAU increase during lockdowns. Assuming COVID-19 resolves by Q3, MAU should revert back to its normal growth rates during the year 2021. Coronavirus significantly halted worldwide economic activity towards the second-quarter. Many businesses, in an attempt to sustain their revenues, have largely cut on ad spending. The decreased demand has a huge impact on Facebook’s ARPU and as long as the epidemic persists, the more significant this will be. More likely than not, there would be negative APRU growth for Q2. Recent boycotts only exacerbate the current negative impact on the ARPU. I had forecasted negative APRU growth for Q2 and a near no growth for Q3 to reflect a slight recovery. Facebook also had invested approximately $5.7 billion into JIO, one of the largest telecommunication companies in India. The hope is that this investment will allow Facebook to tap into a network of small businesses while continually expanding the use of WhatsApp as a commerce tool. This is a potential revenue source, contributing to faster AVPU growth in Asia.
My main concern lies with Facebook's stability and potential growth after the epidemic. All things being equal, Facebook continually displays good growth year-over-year, but it has future headwinds. Albeit the possible stagnation for the following quarters due to COVID-19, I still believe that Facebook could show substantial growth towards the end of the year 2021 and beyond. Facebook continues to place greater emphasis on small businesses that use their platform. A good portion of ad revenue comes from small businesses, although small businesses are financially suspectable during the epidemic. It’s a good move in Facebook's part when they "announced a $100 million grant program to help 30,000 small businesses across the more than 30 countries." Being able to strengthen and form relations with small businesses only helps Facebook in the long term and that is what they are doing.
My model forecasts slight bearishness for Q3 and Q4, but overall ending in moderate bullishness as it progresses towards the end of 2021. Depending on how Facebook plays its cards with its core users and the businesses that it partners with, there could be strong growth during the year 2021. This is assuming that COVID-19 ends before the end of 2020. I primarily focus on two drivers for revenue guidance: Monthly Average Users (MAU) and Average Revenue Per User (ARPU).
As more and more countries undergo lockdown, the average time spent online on social media sites increases. Facebook has seen increased engagement of people on its site, especially with its video calling platform. It is also important to note that as fast as MAU increases, it can also decrease just as fast when COVID-19 restrictions lift around the globe. I believe that the Q2 MAU growth will be of a similar growth of Q1, reflecting a continued MAU increase during lockdowns. Assuming COVID-19 resolves by Q3, MAU should revert back to its normal growth rates during the year 2021. Coronavirus significantly halted worldwide economic activity towards the second-quarter. Many businesses, in an attempt to sustain their revenues, have largely cut on ad spending. The decreased demand has a huge impact on Facebook’s ARPU and as long as the epidemic persists, the more significant this will be. More likely than not, there would be negative APRU growth for Q2. Recent boycotts only exacerbate the current negative impact on the ARPU. I had forecasted negative APRU growth for Q2 and a near no growth for Q3 to reflect a slight recovery. Facebook also had invested approximately $5.7 billion into JIO, one of the largest telecommunication companies in India. The hope is that this investment will allow Facebook to tap into a network of small businesses while continually expanding the use of WhatsApp as a commerce tool. This is a potential revenue source, contributing to faster AVPU growth in Asia.
My main concern lies with Facebook's stability and potential growth after the epidemic. All things being equal, Facebook continually displays good growth year-over-year, but it has future headwinds. Albeit the possible stagnation for the following quarters due to COVID-19, I still believe that Facebook could show substantial growth towards the end of the year 2021 and beyond. Facebook continues to place greater emphasis on small businesses that use their platform. A good portion of ad revenue comes from small businesses, although small businesses are financially suspectable during the epidemic. It’s a good move in Facebook's part when they "announced a $100 million grant program to help 30,000 small businesses across the more than 30 countries." Being able to strengthen and form relations with small businesses only helps Facebook in the long term and that is what they are doing.
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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.