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Investment Overview for Facebook (NASDAQ:FB)

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Impact of Coronavirus

IT software and Services industries are suffering from a fall in demand for software and web services as consumers are focusing solely on essentials and not discretionary products. That said, the industry has seen companies with a portfolio of software as well as services aimed at remote collaboration benefit due to the growing number of people globally. Many companies are also operating with employees working remotely from their own home. The company has reported a fall in advertising revenue over the last few weeks of the quarters and growth has been stagnant over the month of April till the results.

Latest Earnings

For Q1 2020 Facebook, reported revenue of $17.4 billion, up by 17% y-o-y. Meanwhile, Operating Margin rose to 33% from 22% in in same period of the previous year and effective tax rate fell to 16% from 30% in the same period of the previous year. This led to earnings being $1.71, up 2x from $0.85 in the same period of the previous year. The company has not put forward any estimates for Q2 and FY 2020 as the situation is still unclear due to the Covid-19 pandemic. Though, the company reported stagnant revenues for the first three weeks of April compared to the same period in the previous year. We expect the revenue growth to slow as companies will not focus on advertising expenses till clarity regarding the pandemic emerges.

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Below we highlight key drivers of Facebook’s value that present opportunities for upside or downside to the current Trefis price estimate for Facebook.

Advertising On Core Facebook

• Facebook’s Average Monthly Active Users: We estimate Facebook’s average monthly active users across the world to grow from 2.3 billion (average) in 2018 to around 3 billion by the end of our forecast period. The availability of Facebook around the globe, including markets where it is currently blocked and continued success on the mobile platform, will be vital to achieving such growth. There could be as many as 6 billion Internet users worldwide by the end of our forecast period, suggesting that there may still be room for additional upside for Facebook.


• Facebook’s Advertising ARPU: We expect this metric to surge from $24 in 2017 to about ~$44 in the long run driven by the growth in ad pricing and the number of ad impressions on the platform. We believe Facebook will start monetizing its Search and Messenger platforms over the long-run, and this will provide higher ad inventory. At the same time, the continued roll-out of better and more targeted ads (such as video ads) will also drive pricing on the platform, thus leading to higher ARPU. Facebook is still under-penetrated within developing markets, and hence we expect the number of marketers to grow in international markets.

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Facebook is the world’s most popular social network that helps people connect with family and friends. The company makes money primarily through advertising, which it provides to advertisers by targeting specific demographics based on their information posted on Facebook. Also, Facebook facilitates the purchase of virtual goods in games and applications running on Facebook’s platform, charging a transaction fee on each virtual good purchased.

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Advertising On Core Facebook Platform

This remains the most significant division for Facebook, contributing about 92% of its overall value. This high-value contribution can be attributed to two main factors: scale and user engagement. Facebook has over 2 billion monthly active users, and the user engagement within this base is also high. These stellar metrics are a result of innovative product development at Facebook, which includes Timeline, NewsFeed, Messenger, Search, and several other features designed with the long-term vision of ensuring that user stickiness to Facebook remains high. In future years, both scale and user engagement are expected to be strongly driven by growth in the mobile space.

Coupled with the highly active user base, Facebook has also achieved success with its monetization strategy. Its move to raise the proportion of feed-based ads and make the platform less cluttered has garnered success among marketers. Improvement in ad products, along with their targeting capabilities, has driven enhanced ROI and value for advertisers.

Monetization From Instagram and WhatsApp

The monetization of Instagram and WhatsApp is paltry compared to some of its peers. In our view, Instagram’s 1 billion+ active monthly user base, along with high engagement levels on the platform, will make it highly attractive to advertisers. The company has begun monetizing Instagram and we believe this could start providing meaningful revenues going forward. In addition, WhatsApp has more than 1.5 billion monthly active users. We believe the monetization rate for these platforms will improve in the coming years. We think this platform can be monetized in several ways, including annual subscription fees, in-app purchases, online payments, advertising, promoted accounts, social commerce, etc.

Payments And Other Fees

Facebook also makes money by acting as a platform for the purchase of virtual goods on social gaming applications by partnering with gaming companies such as Zynga. Zynga’s games like Farmville and Poker have been wildly popular, enabling Facebook to extract substantial revenues from the sale of virtual goods like Poker chips. Recently, it has introduced a paywall for content providers. However, the ongoing shift towards higher mobile usage from desktop usage has caused pressure on this revenue stream. Payments from the gaming business on Facebook could decline in the near-term.

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Mobile Advertising to Drive Future Growth

Facebook has achieved success in its efforts to improve mobile monetization. The share of the mobile platform in the overall advertising business has risen from 14% in 2012 to over 90% in 2018. The rapid increase in monetization is being driven by growth in ad pricing.

While the number of ad impressions declined by 40% during 2015 due to the ongoing shift towards mobile usage and News Feed ads, the average price per ad impression rose significantly by 136% during the same period, bolstered by the higher prominence of ads, better targeting, and larger number of marketers on the platform.

Social Media Advertising Is Growing Explosively

According to BIA/Kelsey, the social media advertising market in the U.S could rise from $5.1 billion in 2013 to $15 billion in 2018 at a CAGR of around 24%. We expect Facebook to benefit considerably from this growth as its News Feed ads are popular and relevant among advertisers.

Growth Could Decelerate In The Short-Term

We believe revenue growth could slacken in the near-term, due to difficult year-over-year comparisons and FX headwinds. Also, the ongoing decrease in the total number of ad engagements could limit revenue growth in the future. However, in the event, revenue contribution from other businesses such as Instagram, Messenger, and WhatsApp starts picking up, then we could again see an acceleration in revenue growth.

Other Platforms Including WhatsApp, Instagram, Messenger, etc. Have Huge Growth Potential

We think investments on diverse platforms (such as Messenger, Instagram, WhatsApp, Search, and Oculus) could reap multi-billion dollar businesses for the company in the long-run, and management hasn’t even begun scratching the surface of this potential. We think FB could start unlocking value in other businesses such as WhatsApp, Search, and Messenger over the coming years. Overall, we believe all these moving parts will continue to fuel the company’s top-line growth for years to come.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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