Facebook Inc. (Ticker: FB) - Brief Breakdown
In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.
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Company Description
Facebook Inc, is an American multinational conglomerate that specializes in social networking services, messaging, virtual reality, and databases for GIFs and geotagged photos. Facebook Inc owns the two (three if you include Facebook messenger) most visited social media applications: Facebook, with ~169.76 million unique monthly users, and Instagram, with ~121.23 million unique monthly users. Facebook also owns WhatsApp (a popular messaging application), Oculus (a company specializing in virtual reality technologies), Giphy (a GIF database), Mapillary (a geotagged database), and a 9.99% stake in Jio Platforms, which acts as a holding company for India’s largest mobile network operator. Facebook allows people to connect and share with friends, family, and colleagues through mobile devices, personal computers, virtual reality headsets, and in-house devices worldwide. Facebook was founded in 2004 by Mark Zuckerberg (currently CEO) and has grown into one of the top five biggest companies in the world.
Quantitative Analysis
At the time of this writing (7/25/2021), FB is trading at $369.79 with a market cap. of $1.05T and a 52-week range of $226.90-375.33. One of Facebook’s largest social media competitors is Twitter, Inc. Despite its popularity, Twitter has not seen nearly the success that FB has, either in users or market value (see comparison chart below). In Q1 of 2021, Facebook’s revenue was $26,171 million showing a 48% year-over-year (YoY) revenue growth, daily active users rose by 8% and monthly active users rose by 10%. The return of equity (ROE: Net Income / Total Equity *100) of Facebook is 27.54%, the price to earnings (P/E) ratio is 31.68, and the Net Margin (Net Income / Revenue) is 35.74%. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view FB’s 2021 Q1 earnings here and their 2020 Annual Report here. Be on the lookout for FB’s Q2 2021 earnings on July 28th, you can view it here.
Qualitative Analysis
Facebook is the most well known social media platform in the world and also owns Instagram, the second most downloaded social media application. Facebook sees strong profits through ad revenue. With user data, Facebook provides third parties the ability to conduct target advertising based on viewing habits, likes, shares, and purchasing data. Although Facebook has had massive amounts of success, it has been in the headlines recently for various legal issues. In 2020 the Office of Australian Information Commissioner (OAIC) sued Facebook for “significant and persistent infringements of the rule on privacy involving the Cambridge Analytica fiasco.” In December of 2020, the United States Federal Trade Commission and 46 individual states in the U.S. filed a Federal Trade Commission v. Facebook antitrust lawsuit which concerns Facebook’s acquisition of two competitors - Instagram and WhatsApp and ensuing monopolistic situation. These lawsuits are troubling, but the lawsuit with the FTC shows just how large Facebook is in the social media space. Facebook has become an integral part of many people’s lives and as long as the quality does not deteriorate, it seems that will continue.
Bullish Thesis
Here are three points to support the bullish thesis:
Consistent growth: In an industry with a history of fad companies, Facebook appears to be here to stay. In fact, Facebook has done more than proving its stickiness - it continues to grow year after year. According to data reported by businessofapps.com, monthly active Facebook users have increased by ~550% in the last decade and active daily users have increased by ~400% over the same time period. While facebook was founded and initially gained popularity in the U.S., its recent global expansion has given the social media giant worldwide popularity. Indeed, active user growth rates in European and Asian Pacific countries now exceed user growth rates in the U.S. and Canada. A larger, more diverse audience, allows Facebook to widen its appeal to advertisers and can ultimately help the company generate more ad revenue.
Expert data utilization in a world run on data:98% of revenue at Facebook comes from advertising. Facebook has grown to be a marketing dream come true - not only does the platform have a massive audience, but they collect user-specific data that allows marketers to create hyper-specific advertising. However, data-driven ad revenue isn’t the only reason this particular point should make you bullish on Facebook. We live in a world dominated by data, and Facebook has proven itself more than capable of managing and leveraging data to create revenue streams. They could very well offer data solutions as a spin off service to non-advertising companies to create additional revenue.
Adaptability: Facebook has shown time and again that they are capable of adapting their products to meet market demand and remain competitive in the digital space. They do this through a combination of internal innovation, acquisitions, and by introducing variations of existing products. Major acquisitions include Instagram (2012), WhatsApp (2014), and Oculus VR (2014). They recently introduced Instagram Reels, which offers an additional advertising-based revenue stream and bears an uncanny resemblance to TikTok. In May 2020 FB announced Shops - an in-house e-commerce platform that allows users to buy and sell products through a single virtual shop on Facebook, Instagram, and WhatsApp. Shops allows all purchases to occur “in-house” (i.e., directly through Facebook) rather than through “off-site” connections. If FB can continue to adapt and expand its products and services as they have for nearly two decades, expect their value to continue to rise.
Bearish Thesis
Here are three points to support the bearish thesis:
Negative Publicity: Although Facebook is used by the masses, this does not excuse FB from negative publicity. There have been many critics of Facebook and headlines saying that Facebook was hacked and it affected the 2016 election, Facebook is hurting the mental health of users, and claims that the company is predatory with its use of targeted advertisements. When there is a company of this size there will always be detractors, but some of these claims have kept some people off of the website and some refuse to use it. Twitter and Facebook both famously took off former President Donald Trump as well which showed that social media companies can have more control than the most powerful person in the world. Some applauded Facebook and Twitter and others do not respect them for it, in the end it is yet another controversy where Facebook is at the forefront.
Increased Bots: Facebook has said it has blocked 4.5 billion accounts in the first nine months of 2020, and that it caught more than 99 percent of those accounts before users could flag them. The number of fake accounts is equal to nearly 60% of the entire world population and despite removing all of these accounts, Facebook estimates that 5% of its profiles are fake. With this many fake accounts it brings distrust to the company and hurts the user experience while on the platform. Facebook needs to find a way to eliminate bots and fake accounts from its platform in order to better user experience and not allow posts, certain articles, and something of that nature to go viral on its platform.
Lawsuits: As mentioned above Facebook has had its fair share of lawsuits. FB currently has a lawsuit with the FTC and when a large corporation is in litigation with anyone it generally means large quantities of money for legal fees no matter how the case settles. This can also add to the negative publicity that Facebook has had. For better or for worse, public perception always believes major corporations are always guilty before proven innocent so any additional lawsuits will hurt Facebook even more. Legal troubles can also take up time of C-suite individuals in Facebook and negatively affect the psychology of employees which could lead to decreased productivity. Hopefully Facebook can find a way to stay out of legal troubles in the future!
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.