FB stock has had an epic run since its public debut in 2012. Shares have surged nearly 5x, driven by massive global additions to active subscribers and dominance in online advertising - with Google making up the other half of the virtual duopoly. FB has turned into a cash-generating monster over the last few years. Revenue has grown over ~18x since 2012, clocking in at $71bn in 2019. Free cash flow has been equally impressive, increasing ~21x to end 2019 at $21bn.
◾1Q20 impacted by pandemic
The company reported 1Q20 (Mar’20) revenues at $17.7bn, up 18% YoY (down 16% QoQ), the slowest ever revenue growth for 1st quarter, owing to the pandemic and fierce scrutiny worldwide over recent years for its privacy practices. Operating profit for the quarter was $5.9bn, resulting in margins of 33% (+11ppts YoY, -9ppts QoQ), impacted by increased expenses due to the pandemic and higher R&D investment. To deal with the impact of the pandemic, FB has incurred an additional $100m towards an SME support plan and committed $300m in investments.
◾Increased user traction
In 1Q20, FB reported 2.6bn Monthly Active Users (+10% YoY, +4% QoQ) and 1.7bn Daily Active Users (+11% YoY, +5% QoQ). Expect FB to lose some engagement when shelter-in-place restrictions are lifted, and life returns to a more normal.
The quarterly ARPU (average revenue per user) was reported at $6.95 (+8% YoY, -18% QoQ). The ARPU in the mature North American market was at $34.2, while in Europe, where regulatory scrutiny is higher, ARPU was $10.6, followed by $3.1 in Asia-Pacific and $1.9 in RoW.
◾Advertising business-facing short-term challenges
Since the start of 2020, the company is experiencing a decline in its advertising business. The total number of ad impressions increased 39% (-7ppts YoY), mainly due to the promotion of FB News Mobile Feed, Instagram Stories, and Instagram Feed, as well as from the rise in user base and increased online engagement. The average price per ad (APP) on the other hand decreased by 16% largely attributable to the reduction in advertiser demand by SMEs. Given the close connection between the macroeconomy and advertising expenditures, the advertising business will remain under pressure until there is a clear indication of economic stabilization.
◾Facebook boycott campaign a minor hurdle
A number of large corporates advertisers like Coca-Cola, Starbucks, Verizon, Unilever, etc., are boycotting FB ad campaigns. FB has 140mn registered business on its platform, but only 8mn advertisers. Over the years, FB’s top 100 advertising contributors have reduced and represented only ~18% of revenues (1Q20). Expect this action to have a minor impact on FB’s ad revenue as currently most of its revenue is driven by millions of SMEs that depend on its effective targeted ads. With the global economy stabilizing, expect end-user demand to return and drive ad revenues.
◾Huge revenue opportunity from Facebook Shops
FB has accelerated its commerce efforts and supporting SMEs with FB Shops. The FB Shops enables businesses to create a single online storefront that can be used on both FB and Instagram to drive greater sales. The company has partnered with Shopify and BigCommerce, enabling merchants to easily import inventory to the platform and enabling purchases directly within Messenger, WhatsApp, and Instagram Direct. FB Shop's monetization will be driven by higher conversion leading to increased ad spends. This feature will additionally support FB’s recent $5.7bn investment for ~10% of India’s Jio Platforms.
◾Strategic acquisition of stake in Reliance Jio
Facebook has invested $5.7bn for ~10% stake in Indian telecom giant Reliance Jio, a three-and-a-half-year-old subsidiary of India’s Reliance Industries. As of Dec’19, the subscriber market share of Reliance Jio was 32.1% and revenue market share was at 35.4%. This stake purchase is in-line with FB’s strategy of tapping the market for video conference, live-streaming, telecom, and related fields, which are the main focus area for video business.
Additionally, this will bring together JioMart, which is Jio's small business initiative to connect millions of shops across India, with WhatsApp. The company plans to create a super-app WhatsApp (like China’s WeChat) that will be used for communication and payments alike.
◾Expect growth to remain stable over the medium-long term
Expect FB’s advertising business to remain under pressure, but medium-to-long-term growth prospects remain good. FB is still in the early stage of ad platform development and is investing in improving the ad targetability and measurement, along with the shift towards high-quality formats. The company’s massive reach continues to drive growth and profitability and has sufficient cash on hand to deal with risk and make further acquisitions to enhance its product and service portfolio.