2019 Q3 Results
November, 04 2019
TICKER: FB
ISIN: US3030M1027
SHARE PRICE: $193,62
MARKET CAP: $552B
INTRODUCTION
Facebook is a steamroller. Why do I say this? Because even when everybody is announcing the blue app’s death, even when the media are actively trying to undermine its credibility, even when the CEO is being bombarded with questions in the US Congress, the company can still grow its top-line (Total Sales) by 29%.
I’ve looked at Facebook three times before: First, second and third. At first I was not convinced of the company’s moat but gradually I have come to appreciate the stickiness of the business.
Just as a starting point, let’s look at the stock price year-to-date:
A 43% surge in 2019 alone and 16% more than on my first write-up.
And now, let’s look at the long term chart. Yep, the “fear” in late 2018 was the responsible for such a price appreciation this year.
ACTIVE USERS
The active users are still rising. 1,4% to be exact. The fact that I don’t know how this metric is calculated still bothers me. Nonetheless, the average active users are the basis for calculating the Average-Revenue-per-User so it’s better to have this data than not.
We can clearly see that the growth in active users is decreasing. I’ve read someone on Twitter saying that the daily users are growing faster than the monthly users. At 2,2% daily users growth, that seems to indicate that there is higher user engagement.
REVENUE
As I was saying in the beginning of this write-up, the revenue went up by 29% when compared to a year ago, having reached $17,6B. We should always compare Facebook’s revenue year-on-year and not sequentially given the seasonality of the advertising business.
The chart below illustrates the revenue growth year-on-year. It’s no news that the growth rate is declining. Trees don’t grow to the sky. The fact that its growth rate went from 26% in the first quarter to 29% in the third quarter is interesting.
ARPU
And it might be related to two different factors. One is the increasing number of users across the platforms. The other is the amount of $$$ each user generates. Did I say that a user generates cash?
The ARPU is a helpful metric for investors but I recently became aware that we might be comparing oranges to tangerines here. While the Revenue used to calculate this metric is the total revenue across all platforms (Facebook, Whatsapp, Instagram, Oculus, etc), the Users are only those of the core blue app.
I think it would be really good for investors to know what revenue comes from each platform. I don’t really believe Zuck will do us this favour but it would be nice nonetheless.
To better visualize the information above, I’ve reorganized it in the chart below.
The potential for growth is still huge. I can’t believe that Average-Revenue-per-User in Europe is so much lower than in the US. Just imagine if/when Facebook can grow the ARPU for these other regions, what will happen to the revenue.
Given that the human population isn’t growing as fast as Facebook’s population, we will soon see a stagnation in the growth of users. The higher ARPU will then be the major source of growth. Due to the importance of this fact, I’ve decided to breakdown the growth per geographical region.
US and Canada ARPU growth steadily declining year over year but still at a great 25%.
Europe is going through a bit of a bumpier ride and it seems to be stabilizing around the 20% mark.
Asia Pacific is steadily growing again.
Let me remind you that this is the region where Facebook has the most users. Any growth here will have massive impact in the revenue.
And the rest of the world has seen a huge surge in ARPU’s growth as well.
COST BREAKDOWN
As expected, the costs have come down to more “normal” levels, after the first two quarters of the year being marked by the $5B EU fine.
OPERATING INCOME
And as such, the EBIT, or operating income, has gone up massively.
NET INCOME
Which in turn lead to a higher Net Income as well.
CASH FROM OPERATIONS
But what I really want to know is how much cash is the business generating.
And as we can see, Facebook’s operations are still bringing in loads of it.
Facebook can transform more than 53% of its revenue into cash generated from operating activities!!!
The investment in Property, Plant and Equipment, which is also called CAPEX (Capital Expenditures) is coming down from the previous quarters when Facebook had to invest massively in data centers and infrastructure.
Just look at how much the Property, Plant and Equipment has grown in recent years.
I’ve read something about Facebook’s infrastructure being far better than other big tech players but I can’t seem to find that information again. If any of the readers could help me out on this one, I would be much appreciated.
This stats are just brutal. The amount of data that goes through Facebook’s infrastructure is mind-boggling.
The higher Cash-from-Operations together with a lower CAPEX has lead to a record Free-Cash-Flow of $5,631B. For those that thought that a $5B fine was big money….it’s only a quarter’s worth of FCF.
CASH
This huge cash generation leads to a net cash position stronger than it has ever been.
We’ve reached the point where I should conclude if the investment thesis is still valid or if something has changed.
I see Facebook growing for the foreseeable future given the Instagram Shopping, the new payments feature on Whatsapp, etc.
But something that I haven’t talked about much is the competitive landscape and how wide and deep Facebook’s moat is. I’m bringing this up because we are now in the middle of a new Cold War era between the USA (and its allies) and China. The American social media networks haven’t been able to enter Chinese territory because they would have to acquiesce to China’s government demands on freedom of speech and data sharing.
Well, recently we’ve seen a chinese social media app taking over the world. It’s called Tik Tok and it’s a platform where users can share 14sec videos. This can be easily “copied” by Facebook, much like the stories were copied from Snapchat, but the high rate of adoption of this new social media app among teenagers left me thinking about how easily can Facebook’s business be disrupted.
As we can see on the image above, Facebook’s apps are still leading the number of downloads (data for September 2019), but Tik Tok is fourth.
In the battle for control, I don’t believe that the USA will allow a chinese app to dominate the world (remember Huawei?). I don’t know exactly how they will stop it from growing but we’ve recently seen the US government launching a National Security Review on the app. We’ve also seen the Islamic State sharing disturbing videos on the social platform.
All of this leads me to think that the US will do anything to stop Tik Tok or any other chinese social media app from growing. One of the ways to do this is through regulation. And who wins when regulation increases? Usually the companies that have the money to make the necessary changes (I’m thinking about Altria and the tobacco industry).
One last thing that I would like to write here – more like a mental note for future research – is the fact that Mark Zuckerberg has been selling stock. How much of it, I still don’t know, but I will look into it soon.
In the meantime, I will be looking at the unfolding of these events in order to keep assessing the future defensibility of Facebook’s business.
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