Q3 2020
By Manuel Maurício
October 30, 2020
POW!!! Take that! Facebook has posted excellent results for the third quarter. Yes, I know. This was to be expected. Every online business out there has been seeing huge growth so this isn’t exclusive to Facebook. But still, I don’t remember a time when I’ve been more confident about Facebook’s growth prospects. But before we talk about that, let’s check the recent numbers.
Revenue was up 22% and operating income up 12% from a year ago. I don’t really care much about the net income variations from quarter to quarter because there’s usually a lot of noise so I stop at the operating income level.
Truth be told, the operating margin has gone down from 41% to 37%. This was due to several factors. First, the company has hired more than 4.000 employees in Q3 alone (!). Then there are the past capital expenditures that are filtering down to the Income Statement as depreciation, and then there is the increased spending in R&D which, although it creates long term benefits for the company, it has to be expensed right away.
Facebook now has $56 billion dollars in the bank. What will it do with all that cash? No one really knows.
Capital Expenditures
The Capital Expenditures are those expenditures on assets that will last for more than 12 months. These can be buildings, cars, data centers…
I mention this because lil Zuck has been spending a lot of money on Capital Expenditures. He says that it’s to support the next wave of computing. In 2021, the company anticipates capital expenditures to be $21-$23 billion, up from $16 billion (!).
The company now has 16 data centers spread across the world and they are building more. These guys aren’t kidding. As I’ve mentioned before, they are expecting to need a lot of computing power in the future. Let’s check what they’re doing…
Endeavours
First there is the e-commerce opportunity. Facebook is rolling a bunch of new features to support e-commerce across its platforms. Here’s a video on the upcoming Whatsapp business messaging tool.
Then there’s Augmented Reality and Virtual Reality. These are two different things and Facebook is going after both of them. With the recent introduction of the new Oculus Quest 2, Facebook is by far the leading company in VR today.
Facebook has been funding all of the content for the Quest ecosystem so far, but Mark believes that around the 10 million user mark is when other developers will come in and start creating content. This will be big.
Facebook has always been a software company, not a hardware company. But that is slowly changing. One day they will have it all, both hardware and software; and the ecosystem will be so sticky that we won’t be able to live without it. Just check this out…
I’ve tried Oculus several times, and although there is technical stuff to be improved, I am positive that one day we’ll all be using it.
Regarding the Augmented reality, that’s a whole different game because you’ll need it outside of your home so the headset will have to be much smaller and stylish. That’s why the company is partnering up with Essilor-Luxoticca, the world’s largest glasses manufacturer. And Mark says that theyll be releasing it in 2021!!!
Let me make a bold prediction here. One day we won’t need our smartphones. We’ll have smartglasses.
As if this wasn’t enough, Facebook just rolled out its new Cloud Gaming Service. Unlike Google and Microsoft, Facebook is making this available for free. Maybe because the games are still very simple, maybe because it want’s to take market share away from its competitors. One thing is sure; one day the cloud gaming and the Oculus will be completely connected.
WORKPLACE
This is a division that isn’t often talked about. I’ve recently got interested in Slack, which is a platform for communication used mostly for businesses, and much to my surprise I’ve noticed that several of my friends are already using Workplace. I believe it has been growing under the radar for several years. I need to learn more about this.
To sum this all up, Mark is building a platform for entertainment, e-commerce and work. Who else is doing this?
Threats
More than ever, Facebook faces a lot of threats. The new Apple iOS14 will force users choose whether they want to be tracked across different apps to receive targeted advertising. Although this can be a serious blow for Facebook, I believe they will just find a way to go around it, like forcing users to accept targeted adds if they want to access different features within their apps.
We will also be seeing increased attrition between Apple and Facebook going forward. Unlike in many other countries, in the USA, the most used messaging app is iMessage from Apple. Facebook is obviously a threat to that. Add to it the fact that through its platforms Facebook will allow many businesses to make transactions. Apple requires apps on its store to pay 30% of all their revenue. You see where this is going, right? Without the access to what products and services are being sold on the FB ecosystem, Apple will be losing a lot of dollars.
Then there’s also the European regulation regarding transatlantic share of data which will obviously hinder the targeting of the advertising across borders.
Then there are other ways of communicating online. I’ve been hearing about Slack, Teams, Discord, and what not.
These are all important threats to Facebook and should be monitored.
Valuation and Conclusion
Facebook is currently trading at 31x FCF (already discounting the cash on the balance sheet). This is rich.
But I couldn’t be happier with my stake in Facebook. Although the stock isn’t cheap right now, I look at this as my Phil Fisher stock. I will hold it through highs and lows for many years. Sure, I could be trimming my position here and buying it at lower prices, but I guess that’s just not me.
… actually, I could run the virtual experiment of trading around my Facebook position just to see what results both strategies would deliver 10 years from now… humm…
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