Facebook,
Q1 2019 - Results
April, 25 2019
1. PREVIOUS ANALYSES
I’ll start this analysis by reading my first take on Facebook.
2. RESULTS
Once again, Facebook releases its financials in a very simple and clear way.
3. POSITIVES
3.1. Nothing about Instagram or Whatsapp
Sometimes what is missing is more important than what is stated. The fact that Facebook didn’t disclose any new developments about Instagram or Whatsapp, while still beating all the estimates tells me that there is enormous untapped potential.
3.3. Active users are up
Daily active users and monthly active users are up by 8%. This growth comes mostly from “Asia Pacific” and the “Rest of the World” regions.
I look at this metric more less the way I look at book value in general. Everyday it means less for me. I’m not sure how Facebook accounts for its “active users” but I’m becoming more suspicious of it. A person may never use the FB app but with all the difficult-to-turn-off notifications that compel people to open the app, I’m not sure how reliable this metric can be.
3.3. Revenue is up
With revenue surpassing the $15Bn mark, this was another first quarter record. Revenue has gone up by 26% from a year ago.
3.3. ARPU is up
ARPU across all regions was up. As I’ve stated on my first analysis, the “Asia Pacific” and the “Rest of the World” are where the bulk of the FB users are right now and their ARPU is way lower than in the US and Europe. As we see ARPU from these two regions go up, we’ll also see major revenue growth as well.
3.2. FCF is up
As you might’ve noticed by now, I give massive importance to the cash flows of a company, especially one like Facebook.
It’s astonishing to see the amounts of cash Facebook generates. Even with people saying that no one uses Facebook anymore, the company has generated a record $9,3Bn from operations in the first quarter alone.
Free cash flow followed, having reached $5,3B!!!
3.4. Strong financial position
The company still holds lots of cash – $45B vs $41B – and has zero debt.
4. NEGATIVES
4.1. $3B fine
Facebook has set aside $3B for the eventuality of a fine related to the user data and privacy issues. It says that this fine might be between $3B and $5B.
4.2. Net Income is down
And because of that $3Bn provision for an eventual fine, the net income was down massively. If the company didn’t set aside those $3Bn, net income would’ve been $5,4Bn – another record first quarter.
4.3. Headcount
Although the headcount was up significantly in recent quarters and this could be seen as hiring new workers to widen the moat around the castle every day, I can’t say this is the ideal situation. I would love for Facebook to be able to fight off the competition or the regulators without having to hire one more person.
4.2. Share buybacks slow down
The company has spent $613M in share buybacks from $1,7Bn a year ago. I would’ve liked to see this number go up, not down.
4.3. Operating leases - new entry to the balance sheet
I don’t consider this to be neither good nor bad. Due to new accounting rules, Facebook is already stating the operating leases on its balance sheet. We’ll be seeing the impact of this rule in many other companies especially for those working on retail.
5. OVERVIEW & CONCLUSION
5.1. OVERVIEW
After reading through all of the positives and negatives, my conviction that Facebook is a great company is massively reinforced.
On my first analysis I’ve identified 4 major catalysts for growth: Increasing ARPU in Asia and Rest of the World; Stories and Whatsapp being monetized; Instagram users still growing and Artificial Intelligence. All of these four are as valid as in the day I’ve wrote them, nothing has changed. Facebook still has a lot of avenues for growth.
With the share price going up to the current $195,8, the potential rate of return obviously goes down but I still see FB capable of generating $16 per share in FCF in 2023, which at a multiple of 20x would amount to $320, plus the $55 per share it will have generated until then plus the $16 per share that stands currently on the balance sheet, would lead to a share price of $390 or a 15% CAGR.
5.2. CONCLUSION
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