Facebook, Inc.
NASDAQ: FB
COMPANY
DESCRIPTION
Facebook, Inc. provides various
products to connect and share through mobile devices, personal computers, and
other surfaces worldwide. Its products include Facebook Website and mobile
application that enables people to connect, share, discover, and communicate
with each other on mobile devices and personal computers; Instagram, a
community for sharing visual stories through photos, videos, and direct
messages; Messenger, a messaging application to communicate with other people,
groups, and businesses across various platforms and devices; and WhatsApp, a
mobile messaging application. The company also offers Oculus virtual reality
technology and content platform, which allows people to enter an immersive and
an interactive environment to train, learn, play games, consume content, and
connect with others. As of December 31, 2017, it had approximately 1.40 billion
daily active users. Facebook, Inc. was founded in 2004 and is headquartered in
Menlo Park, California.
RECOMMENDATION
We rate Facebook,
Inc. a BUY. Below are the basic reasons to recommend this stock as a BUY at
the price value of 165.
·
Facebook has witnessed significant traction in
online and mobile advertising spending in a short span of time. In 2017, Mobile
ad revenues grew 56% over 2016. The increase in mobile advertisement stems from
the fact that mobile ads have far more ad recall value than other mediums.
Since marketers are moving to mobile to target customers, Facebook is
enthusiastically monetizing this shift.
·
Facebook intends to capture the opportunity
presented by ever-increasing video viewing on social media platforms. Earlier,
the company had mentioned that video was emerging as a “megatrend” on the same
lines as mobile. Online video is the most lucrative component of digital
advertising. As video ads generate more revenues than its photo and text-based
substitutes, Facebook is trying to incorporate more and more video-oriented
content to bring in more ad dollars. The company launched Watch, a dedicated
tab for video viewing, to achieve its goal.
·
Instagram has emerged as an important cash cow
for Facebook after opening its ad platform to worldwide advertisers. Although
no exact numbers about contribution from Instagram are shared, the growing
adoption among advertisers is highly prominent. To bring more advertisers (over
2 million and counting), Facebook said it has unveiled new tools to promote
posts and evaluate business performance directly within Instagram. “Stories” on
Instagram has surpassed 400 million daily actives. The company is now working
on adding video chat, sound tracks and a new Explore tab on Instagram soon.
·
Messenger, WhatsApp and Oculus are the other
extremely prized possessions. Facebook is aggressively working on monetizing
the opportunities presented by its subsidiaries. Chatbots and “conversational
commerce” are likely to be the strategies for Messenger and WhatsApp. The
company remains excited as it opened the Messenger app, which has over 1
billion users, to developers for creating chatbots that would enable businesses
to extend customer service and other transactions. A few weeks back, management
had announced that it will be opening its subsidiary platform, Messenger, to
worldwide advertisers, albeit for test run purpose only. This underscores the
company’s efforts to monetize the platform. The WhatsApp acquisition (2014) not
only expanded the company’s mobile product lineup but also added a user base,
which is predominantly young. At the same time, the acquisition eliminated
Facebook’s fastest-growing competitor in terms of user additions. With an
estimated user base of over 1.3 billion, it remains one of most important
businesses. To monetize the platform, the company has dropped the subscription
fees and will eventually bring “conversational commerce” to the platform.
WhatsApp now boasts 1 billion daily actives. Oculus will fuel the company’s
ambitious AR/VR efforts. At its Oculus Developer conference held in October
last year, Facebook announced another $250 million investment to develop VR
content ecosystem. It also announced some new products including Santa Cruz, a
cheaper standalone VR headset with inside-out-tracking. Earlier this year, it
had launched its VR headset, Rift. AI and AR/VR technology are fast emerging as
lucrative business opportunities. The company has roped in Hugo Barra to
spearhead its VR efforts as well as head Oculus. Plus, Facebook said it will be
spending over $3 billion in the next 10 years on VR.
·
Facebook has a strong balance sheet and
generates significant cash flow, which makes it an attractive stock for
investors. The company has cash and cash equivalents of $42.31 billion at the
end of second-quarter of 2018. Free cash flow amounted to nearly $2.8 billion.
The company continues to invest in developing its platform and products. We
believe that its ability to generate strong cash flows will help it to make
further investments in product development and acquisitions in the future.
·
Facebook is considered to have pioneered the
concept of social networking, which is why it enjoys a first mover’s advantage
in this market. The company’s user base continues to grow at a significant pace
driven by new features and tools that improve engagement. However, as developed
regions mature, Facebook has taken measures to drive penetration in emerging
markets of South East Asia, Latin America and Africa. The Free Basics
Initiative, which involves partnerships with local telecom networks to
subsidize some basic Internet services (including Facebook), so that users can
get them free or at nominal rates, is expanding its presence in these emerging
regions. Facebook has collaborated with France-based Eutelsat Communications to
launch a satellite that would beam internet in sub-Saharan African regions. It is
also testing Express Wi-Fi and developing laser technology to move loads of
data at super-fast speed along with Aquila, a solar-powered aircraft to beam
internet from the sky. At F8 2017 conference, Facebook announced that it is
working on solar-powered drones and MMW technologies. Aquila had a successful
second flight. As far as connectivity speeds are concerned, Facebook said that
it has broken a few records. In case of wireless transfers, the company has
achieved a point-to-point data rate of 36 Gbps over 13 km with MMW technology
and 80 Gbps using the optical cross-link technology. We believe these
initiatives will significantly drive Facebook’s user-base in these regions in
the long run.
·
Of all places, India deserves special mention in
terms of user growth. The world’s second largest populated country offers
tremendous potential. The number of mobile Internet users in the country, which
has nearly 1.4 billion people, was 456 million in December 2017. Per IAMAI
report, given the availability of cheaper smartphones, faster connectivity and
affordable services, the figure is estimated to reach 478 million by June 2018.
This bodes well for Facebook as most developed markets have reached maturity.
With China off the radar, India can prove to be a terrific growth engine. A
burgeoning well-educated middle class, increasing spending power and rapid
adoption of smartphones will boost Facebook’s prospects in the country.
LAST EARNINGS
Facebook reported second-quarter 2018 earnings of $1.74
per share that missed the Consensus Estimate by a penny. However, the figure
surged 32.1% from the year-ago quarter.
Revenues of $13.23 billion also lagged the Consensus
Estimate of $13.40 billion. However, the figure soared 41.9% (38% at constant
currency) from the year-ago quarter. Management stated that Instagram is
growing more quickly than the core Facebook app.
Geographically, Asia-Pacific was the strongest region
with revenues growing 47.6% year over year, followed by Europe’s 47.3% and Rest
of the World’s (RoW) 42.8%. U.S. & Canada revenues increased 37.2%.
Average Revenue per User (ARPU) growth was strongest in
Europe, up 39.5% year over year, followed by the U.S. & Canada’s 33.7%
growth. RoW and Asia-Pacific grew at 29% and 23%, respectively.
No comments:
Post a Comment