Is this FAANG icon a buy?
It’s time to assess a social media icon. Here is the deep dive on $FB, otherwise known as FaceBook.
Current Price: $324.61
52/Wk High: $384.33
52/Wk Low: $244.61
Market Cap: $915.2 Billion
3 Month Performance: -12.22%
Read below for the break down!
Facebook ($FB), the proclaimed social media king was founded in 2004 and has since grown to become one of the largest technology companies in the world, boasting not only over 2.8 billion MAUs as of the most recent quarter, but a continual drive for advancement.
Prior to digging into Facebook, it's only right to address the company’s current standing and leadership both on the user and ad spend fronts. According to eMarketer, Facebook will end the year hitting $50 billion in US ad revenue, totaling 23.8% of total US digital ad spend in 2021.
Furthermore, while the company has been experiencing US ad revenue deceleration for years, the company maintains over 10 million different advertisers and more users than any other social media conglomerate.
With a combination of platforms and products such as Messenger, Instagram, WhatsApp, Oculus, Workplace, Portal, Novi, and more, FaceBook’s user base continues to expand significantly, with MAUs expanding for more than nine quarters in a row.
Breaking down Facebook’s revenue streams, the company clearly relies on advertising. While the company has been expanding into the world of VR, e-commerce, cryptocurrencies, and now the metaverse, 98% of Facebook’s revenue was a direct result of advertising throughout 2020.
Making up the remaining 2% of revenue throughout 2020, the Oculus and Portal segments picked up the slack.
In essence, Facebook’s business model is quite simple, the company allows users to use their tools for no cost while allowing companies to advertise to those users through a vast multitude of platforms.
Sifting through Facebooks’s stock price according to TREFIS (@trefis) data, 93.8% of the stock price is based on the company’s Core Advertising segment.
Furthermore, 1.7% is based on Payments, Fees, and Oculus, while the remaining 4.5% is based on Facebook’s cash and or net of debt.
Facebook is led by founder, chairman, and CEO Mark Zuckerberg, who founded Facebook while attending Harvard in 2004. Since then, Zuckerberg has led the company through thick or thin, building it into the over $900 billion company it is today.
Throughout his time leading Facebook, Zuckerberg has built a leadership team boasting a wealth of wisdom with prior experience from the likes of Google, Zynga, Mozilla, and multiple presidential administrations.
In recent news, Facebook has encountered what you could call a dump truck load of negative headlines, policy pressure, and technology challenges.
Throughout the course of recent months, documents have been leaked and whistleblowers have made themselves known, accusing the company of putting profits over the health of users.
While the media backlash has been staunch, the company itself has been resilient, publishing an internal report showing that hate speech prevalence dropped by nearly 50% throughout the previous three quarters.
The company noted that their Community Standards Enforcement Report showed that hate speech was prevalent in just 0.05% of content viewed, which represented that double-digit decline.
Facebook went on to address recent pressure after citing its most recent data.
“Data pulled from leaked documents is being used to create a narrative that the technology we use to fight hate speech is inadequate and that we deliberately misrepresent our progress.”
The company went on to say.
“What these documents demonstrate is that our integrity work is a multi-year journey. While we will never be perfect, our teams continually work to develop our systems, identify issues and build solutions,” Guy Rosen, VP of Integrity said.
The rest of Facebook’s press release on the matter can be found here:
On the technology front, Facebook most recently moved to the downside following Snapchat’s earnings woes as a result of privacy changes made at Apple.
Months ago, throughout the rollout of Apple’s new IOS, the company made privacy changes, setting new privacy controls and limiting what digital advertisers could track.
The most significant feature highlighted was the new pop-up Apple would serve all users when using an app, which asks the user if they would like to allow tracking “across apps and websites owned by other companies” for the purpose of advertising according to Reutuers.
Social media conglomerates reacted to the news, many noting that earnings would be negatively affected. Well, those effects could be coming to fruition after investors witnessed Snap missing revenue and ARPU targets in Q4.
“Our advertising business was disrupted by changes to iOS ad tracking that were broadly rolled out by Apple in June and July,” CEO of Snap Evan Spiegel said.
“While we anticipated some degree of business disruption, the new Apple provided measurement solution did not scale as we had expected, making it more difficult for our advertising partners to measure and manage their ad campaigns for iOS,” Spiegel continued.
Furthermore, Facebook predicted headwinds from the IOS 14.5 change in the previous Q2 earnings report.
“We continue to expect increased ad targeting headwinds in 2021 from regulatory and platform changes, notably the recent iOS updates, which we expect to have a greater impact in the third quarter compared to the second quarter,” CFO Dave Wehner said.
Given the effects Apple’s privacy changes made on Snap, investors now fear how those changes will affect Facebook and Twitter, and investors are nervously awaiting Facebook’s Q3 results that are slated to be released on Monday, October 5th after market close.
On a more positive note, Facebook continues to expand into the “metaverse” and cryptocurrency world.
Just last week, Facebook rolled out a plan to hire over 10,000 employees across the EU in order to help build the metaverse. The company noted that they were excited for the future.
“Facebook is at the start of a journey to help build the next computing platform. Working with others, we’re developing what is often referred to as the metaverse — a new phase of interconnected virtual experiences using technologies like virtual and augmented reality,” management noted.
You can read more on Facebook’s plan for the metaverse here:
In reference to Facebook’s metaverse push, The Verge reported on Oct. 19th that the company is planning a major rebranding, in which according to sources will be announced in the coming days or weeks.
According to The Verge, the rebranding announcement could come from CEO Mark Zuckerberg at the Facebook Connect conference on October 28th.
You can read more on the rumored rebranding of the company through the link below:
Finally, Facebook recently announced a major partnership with Coinbase ( $COIN ), a leading cryptocurrency marketplace. The partnership will solidify Coinbase as Facebook’s crypto custody partner of Novi.
You can read more about Novi and the Coinbase partnership below:
Digging into the numbers, Facebook ( $FB ) beat Q2 2021 expectations with an EPS of $3.61, better than the analyst’s EPS consensus estimate of $3.03. On a year-over-year basis, EPS improved by 100.56%.
On the revenue front, Facebook delivered $29.077 billion in total revenue throughout the second quarter, representing 56% growth year-over-year. Do note, Q2 2020 revenue totaled $18.687 billion.
Sifting through revenue, $28.580 billion in revenue was a result of advertising while just $497 million was a direct result of other revenue streams. On a year-over-year basis, advertising revenue expanded by 56% while other revenues grew by 36%.
Shifting into margins, operating margin improved year-over-year, landing at 43%, representing a significant improvement over the same time 2020 level of 32%.
Furthermore, net income jumped by 101% year-over-year in Q2, bringing total net income to $10.394 billion. Do note, the Q2 2020 net income level was $5.178 billion.
Income from operations also improved significantly, increasing by 107% year-over-year to $12.367 billion. Do note, income from operations totaled $5.963 billion in Q2 of 2020.
Shifting into cash flows, free cash flow (FCF) improved year-over-year to a whopping $8.511 billion. When compared to the Q2 2020 level of $514 million, FCF improved by 1555% YoY.
Exploring user metrics, Facebook reported 1.91 billion daily active users (DAUs) in Q2, representing a 7% increase year-over-year. Alongside DAUs, monthly active users (MAUs) increased to a total of 2.9 billion, representing a 7% jump as well.
Coupled with both MAU and DAU growth, family daily active people (DAPs) expanded by a stronger 12% year-over-year, bringing total DAPs to 2.76 billion. Finally, family monthly active people (MAPs) increased by 12% to 3.51 billion.
Rotating into average revenue per user (ARPU), worldwide ARPU increased year-over-year to $10.12 from $7.05, representing a 43.55% improvement year-over-year.
Furthermore, US & Canada ARPU increased by 45.29% year-over-year from a smaller $36.49 to $53.01 in Q2 2021. In short, Facebook experienced improvements in ARPU throughout every geographic segment in the second quarter.
Leadership was upbeat on the results.
"We had a strong quarter as we continue to help businesses grow and people stay connected," CEO Mark Zuckerberg said.
Looking to the future Facebook noted that they expect year-over-year growth rates to decelerate given tough comparables.
“In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth,” Wehner said.
Shifting into the balance sheet the numbers are strong.
Total Debt: $556 Million
Total Liabilities: $32.382 Billion
Total Assets: $170.609 Billion
Cash & Short Term Inv: $64.080 Billion
On a valuation basis, Facebook has been seeing a continual decline.
Price to Earnings: 24.07x
Forward Price to Earnings: 20.22x
Price to Sales: 8.84x
Price to Book: 6.66x
Price to Free Cash Flow: 28.78x
Management has been effective.
Return on Equity: 31.33%
Return on Assets: 25.11%
Return on Invested Capital: 27.42%
Given the numbers the analysts are bullish with a mean price target of $421.63/share, representing a 29.89% upside from current prices.
The high price target is $500.00/share, representing a 54.03% gain, while the low price target is $300.00/share, representing a -7.58% downside.
The big money is quite involved with 78.69% of Facebook being owned by institutions. Top holders include The Vanguard Group, Fidelity Management & Research, and BlackRock Institutional Trust.
On a technical basis, Facebook has been trending to the downside. According to the six-month charts, the MACD is moving with decelerating upside momentum around -7.39 within a tight range.
The six-month charts are also indicating an RSI of 38.08 and CCI of -86.84, both of which are trending lower.
Exploring investor sentiment the bears believe continual company scandals, regulatory threats from governments around the world, and data issues involving privacy changes are reasons to predict future downside.
The bulls maintain that Facebook is the clear social media leader, has an edge for advancement, and that new growth areas such as e-commerce, cryptocurrencies, and the metaverse are reasons to predict future upside.
In short, Facebook ( $FB ) is a solid company no matter what the negative headlines indicate, boasting a solid balance sheet, consistent growth, a reliable management team, and expanding margins, coupled with leadership that has an appetite for growth.
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Disclaimer: This is not direct financial advice, simply an opinion based on independent research.