Facebook, Inc. is an American online social media and social networking service company based in Menlo Park, California. Its website was launched on February 4, 2004, by Mark Zuckerberg, along with fellow Harvard College students and roommates Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes.
FB is already available in the app
Disclaimer: please do not base your investment decisions on any other peopleās opinions in the world except for yourself.
Evening Everyone,
I have recently been amazed by how significantly the market can be irrational and merciless. Everyone knows about the recent 20% drop in Facebook, right? Here I would like to look closer into the figures and see whether they are indeed frightening (as with, arguably, Netflix) or the investors are simply panicking and opening room for discounted purchasing.
Once again, I will attempt being objective as much as it is physically possible and concentrate on the figures (but donāt promise due to being biased on this stock [it is a significant part of my portfolio]).
Overview
Facebook is a huge machine. It owns very many things that it is even hard to list (FB itself, WhatsApp, Instagram and many more). If curious, have a look. This week, the company has issued its quarterly report with financial results. The numbers grew, but not exactly in line with Reuters analystsā expectations: the operational expenses increased significantly, whereas the revenue and the user base growth were slower than the forecast. Although this was already evident from the report for the first quarter, we can now figure out whether Facebookās business modelās performance has deteriorated or not.
Active Users
Facebook has increased the number of Daily Active Users by 11% compared to the second quarter of 2017: from 1.32 to 1.47 billion users. Albeit analysts had expected 1.49 billion. This slowing growth is now lasting for five consecutive quarters.
The growth of active Facebook users in millions. In brackets - growth to the same period a year ago:
| Year | Q1 | Q2 | Q3 | Q4 |
|----------------------------------------------------------------|
| 2016 | 1090 (+16%) | 1128 (+16%) | 1179 (+17%) | 1227 (+18%) |
| 2017 | 1284 (+18%) | 1325 (+17%) | 1368 (+16%) | 1401 (+14%) |
| 2018 | 1449 (+13%) | 1471 (+11%) | TBC Oct 2018 | TBC Jan 2019 |
Another long-term problem is that the company has, arguably, reached the user limit in the US and Canada - 185 million. The growth has also slowed due to the Cambridge Analytica scandal: some users publicly deleted accounts in Facebook earlier in 2018. Whilst it turned out not being a big deal (the share price got back to its pre-scandal position in 60 days), the problem is that the US and Canada users bring (!) 47% of all revenue. Therefore, if the user base does not grow and raise the advertising revenue organically (more users = more money), Facebook now must invest into R&D-ing the algorithms that will help advertisers target potential buyers more precisely. And only then FB could increase the cost of advertising that would compensate slower user growth.
Now we established that the US and Canada user base growth is slowing down a lot, letās look at other regions too. In general, the growth of new active users is slowing everywhere across the globe, but not as severely as in North America.
The growth of active Facebook users by region in millions (comparing to the same period the year before):
| Period | US and Canada | Europe | Asia | Rest of the world |
|----------------------------------------------------------------------|
| Q3 2017 | 185 (+4%) | 274 (+7%) | 476 (+29%) | 433 (+15%) |
| Q4 2017 | 184 (+2%) | 277 (+6%) | 499 (+26%) | 441 (+14%) |
| Q1 2018 | 185 (+2%) | 282 (+5%) | 529 (+24%) | 454 (+11%) |
| Q2 2018 | 185 (+1%) | 279 (+3%) | 546 (+20%) | 461 (+10%) |
Revenue
Facebook increased its revenue by 42% compared to the second quarter of 2017: from $9.3bn to $13.2bn. Analysts had expected $13.36bn (FB was $0.16bn or 1.2% short).
It is becoming harder to earn money: the user base is heading towards its limit in the US and Canada. GDPR being a pain in the back in Europe, whereby users can restrict the extent to which Facebook can use their data. And at the end of the day, usersā data is Facebookās bread and butter, ultimately, the core source of income the company generates from the advertisers. It is rather evident that more bearish news than bullish (animalās definitions can be found in this great post) are being featured about Facebook recently, but we will get to the positives later.
Facebookās revenue in billions and % comparison to the same period the year before:
| Year | Q1 | Q2 | Q3 | Q4 |
|----------------------------------------------------------------------|
| 2016 | $5.38 (+52%) | $6.43 (+59%) | $7.01 (+73%) | $8.81 (+51%) |
| 2017 | $8.03 (+49%) | $9.32 (+45%) | $10.33 (+47%) | $12.97 (+47%) |
| 2018 | $11.97 (+49%) | $13.23 (+42%) | TBC Oct 2018 | TBC Jan 2019 |
As you can see, quite healthy growth numbers even in the span of 3 years, but only when looked at in isolation. The problem is that Facebook was unable to compensate slower user growth with higher advertising prices - revenue growth per user also slowed down in all regions. And GDPR will only make it worse in Q3 and Q4.
To give you some context into the significance of the American users (bearing in mind that only about 12.5% of all users are American), see Facebookās revenue on a per-user basis by region in USD:
| Period | US and Canada | Europe | Asia | Rest of the world |
|---------------------------------------------------------------------------|
| Q3 2017 | $21.2 (+35%) | $6.85 (+45%) | $2.27 (+20%) | $1.59 (+31%) |
| Q4 2017 | $26.76 (+35%) | $8.86 (+48%) | $2.54 (+23%) | $1.86 (+32%) |
| Q1 2018 | $23.59 (+38%) | $8.12 (+50%) | $2.46 (+24%) | $1.68 (+32%) |
| Q2 2018 | $25.91 (+34%) | $8.76 (+39%) | $2.62 (+23%) | $1.91 (+29%) |
Profit
Facebookās profit went up by 33% compared to the second quarter of 2017: from $3.9bn to $5.1bn. As well as the revenue, it slowed down - the company increased its operational expenses by 50%.
Two quarters ago, the management has warned the investors of potential costs increasing due to the war against fake news. Moreover, Cambridge Analytica scandal and GDPR already have and further will inevitably lead to additional expenses on equipment and specialists to comply with regulations and avoid future data security issues.
Facebookās and its close competitorsā Ratios
| Ratio | Facebook | Alphabet | Twitter |
| -----------------------------------------------|
| EV/EBITDA | 22.4 | 25 | 629 |
| EV/CF | 21.9 | 20.1 | 393 |
| Debt/EBITDA | -0.2 | -0.3 | 0.4 |
| ROIC | 39% | 14% | 2% |
| Revenue Growth | 46% | 25% | 11% |
Conclusion
The US stocks industry has existed for a long time and is the most robust in the world, and yet, is very often illogical and irrational. If the results of a said company do not match with the analystsā forecast, the share price falls inadequately (Facebook underdelivered the expected revenue by 1.2% and lost 20% in value overnight). Although Facebook continues to grow faster than anyone in their sector, there are three āhoweversā, which you have seen a number of times in this post:
To say that no one expected a 20% drop is a severe underestimation. Many investors are panicking (the prices still kept going down even after the 20% fall on day 1), but letās wait for a second and think without emotions. The fall has taken place and been priced for (rather expensively), it is far too late to panic. Looking at the positives: Facebook is still growing faster than most of the companies in its sector, notwithstanding its huge valuation. It has a very healthy balance sheet, ridiculously low debts (read: recession proof / monetary policy contraction [rising interest rated] proof), and strong ratios. It has fascinating fundamentals, which one should not discount when making a decision on whether to buy or sell. For a long-term investor, it is still worth taking a careful and weighted consideration, especially given potential monetisation of WhatsApp, and further expansion of many other brands Facebook possesses. Facebook.com (as a social network) is quite likely to live in a bear market in perpetuity from this point, but it will be replaced with other services, hence Facebook itself (as a conglomerate) still has plenty of room for growth in its sector. For sure, the management will do everything in their capabilities to use Facebookās huge capital to retain its position in the market and prove to investors that the stock is still viable despite its original brand gradually disappearing from peopleās lives.
Again great analysis! Thanks!
Actually I have one question, where and what you use to get all the data to make this great analysis?
Basically I think it would be interesting to know the behind the scene on how you do it. Especially for people new to investing.
Thanks again for this analysis, it was very instructive!
Thank you, that is a great question!
Most of the the metrics I used came from FBās recent report on their āInvestorsā relationsā page, past data is also there.
So these would be their accounts and there I took the data on users and per-user revenue. Some of the qualitative assumptions and facts are either common sense or the news and a bit of Wikipedia, which was linked at the start. I do not think there was anything else. These big companies always make it easy to analyse themselves, providing top quality raw data.
Thanks again @Vlad!
That is really interesting!
I donāt know why I was imagining many websites to get all the raw data, instead they offer already a wealth of them to make analysis.
Smaller companies, comparatively, that I saw so far offer less back data than FB like 3-5 years. Is still possible that I didnāt understand things right ;-).
Out of curiosity what do you use as stocks scanner?
Thank you for your work. An interesting read!
Do you have an opinion on whether it is a Buy or a Sell right now?
Have you tried making a DCF for FB?
Iām a buyer too. 20% fall was too much. Suck it up. This machine is going nowhere. It will dominate yours and your childrenās lives. Be brave. Dig deep. Hold on. It will serve you well in the end.
@szb, I certainly would not recommend anything, but can only say that I doubled my position with FB last week. Albeit that is my tolerance for risk, I will not suffer if FB will become a new MySpace in the next 5-10 years, if I feel I need to withdraw my position, I will. Which is why one should not base their decisions on peopleās recommendations. I did not do DCF as it did not come to my mind back then. Might do it when looking at another security, thanks for suggesting 
Whilst I feel thatās the obvious next step for them to take, I canāt stand ads on apps and so Iām extremely turned off by this approach. I donāt want to see ads on a service for sending folk messages. Looks like Iāll be getting something like Telegram 
ETA: Would be interesting to see how non-intrusive they will be in the app itself.
@Lkinsman Iām totally with you on in-app ads; invasive, unwieldy and they make for a very grubby UX.
As iāve understood it from the article, on the face of it the WhatsApp user experience wont change, i.e. thereāll be no adds in app. Rather, Facebookās platform becomes a conduit for communicating with customers who are users of WhatsApp. The big concern for me is data sharing; contacts, location, etc, with businesses and other organisations that want to use this new tool. And whatās next? Cue chatbotsā¦
Published last week, the DCMS Committeeās Disinformation and āfake newsā: Interim Report, linked below makes for some pretty wild, and in my view, required reading.
https://publications.parliament.uk/pa/cm201719/cmselect/cmcumeds/363/363.pdf
Iāve just re-read the article (was up late last night) and yeah it seems youāre right, the UX wonāt be changing much, however the data sharing is also a big concern and I try to avoid letting apps access my location, contacts, etc where possible unless itās obviously necessary. Will read your suggest reading document later today, thanks!
Instagram has a lot of influencers, could be massive if combined with allowing brands to find influencers.
Facebookās F8 developer conference is today & theyāre announcing a lot of product updates. Iām pretty underwhelmed by these to be honest.
Yeah thereās nothing revolutionary here.
āWe believe you can build practically any utility on top of messaging,ā says Facebookās head of Messenger Stan Chudnovsky
Messengerās goal is to be WeChat for the western world 
So Facebook paid a $5bn fine today to settle āprivacy concernsā -
but this threadās quite an interesting take on how this could potentially work out very much in their favour -
Not looking great for Facebook at the moment, short term glitch or long term problems? Glad I never invested personally.
In my opinion Facebook is going to be fine in the long-term, but there are inevitably going to be bumps across the road. They created a completely new industry and now they have to face all the regulations coming with that. Some people donāt understand how huge Facebook is and think they can dissapear like myspace. That is the only company that I can think of that have such a big control over one industry.