Facebook's Ascent From The Depths Of Despair Is Underway

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About: Facebook (FB)
by: Steven Fiorillo
Summary

Over the past two years, FB has almost doubled their 4th quarter revenue as it has increased by just over $8.1 billion.

On a monthly basis, FB's global reach for engagement of their products hits 2.32 billion people.

Since Q4 of 2016, Facebook has added 11 million monthly active users in the US & Canada, 32 million in Europe, 274 million in Asia-Pacific, and 144 million throughout the rest of the world.

The US & Canada region accounts for 12.2% of Facebook's daily active users and 10.4% of their monthly active users, yet, it generates just about half of their total revenue.

In late November 2018, I wrote an article about how Facebook (FB) was undervalued and it looks like the Phoenix has started its ascent from the depths of despair. Headlines have been the ultimate deterrent for Facebook's stock as the numbers keep getting better. FB is one of the top victims of negative headlines from antitrust to regulation rumors. Investors need to pay attention to the facts and omit "what ifs" as if they were a question on the SAT's. This is a company that is embedded in everyday life from teenagers to grandparents. Facebook is still growing and is one of the best places for a business to spend its advertising dollars. I believe that FB has started to reverse the declining trend from July as the underlying business is healthy and growing. I wouldn't be surprised if FB's stock gradually continues to climb throughout the year and takes out its previous highs.

Focus on the numbers, not the noise part one - engagement

Facebook released their 2018 Q4 and full-year results last week and unlike the headlines would have you believe, Facebook continued to grow. It doesn't seem as if their customers are too worried about data breaches or privacy issues. I am not shocked as everywhere you turn people have their faces buried in their phones or tablets. I remember reading headlines about people leaving the platform but this was all speculation. Investors need to review the quarterly reports which are published instead of forming opinions off someone's theory. At the end of the day, daily active users (DAUs) and monthly active users (MAUs) are still increasing.

In Q4 2018, FB increased their DAUs by 28 million users. The increase from 2018's Q2 to Q3 was 24 million users and from 2018's Q1 to Q2 was 22 million users. It is inevitable that FB will flatten out their user growth at some point, but the user base is still growing. Facebook is a global brand and when I evaluate the growth on a global scale, it's remarkable. At the end of 2016, FB was far from a new company and had already experienced large global growth. From the end of Q4 in 2016 to the end of 2018's Q4, the FB's growth in every market has been phenomenal. FB has found a way to increase engagement in a way few have done in the past and the global growth has led to monetization of large profits. Over the past two years, FB has added 297 million users. This increase consists of 6 million in the US & Canada, 20 million in Europe, 181 million in Asia-Pacific, and 90 million for the rest of the world.

(Source: Steven Fiorillo) (Data Source: Facebook Q4 Report)

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(Source: Facebook Q4 Report)

There is a similar story in monthly active users, but the numbers are, in my opinion, more impressive as the penetration on a global scale is much deeper. Similar to the DAUs, Facebook's MAUs have increased sequentially quarter over quarter for the past two years. FB has grown their MAUs by 460 million users over this time period with the most growth coming from Asia-Pacific and the rest of the world. Currently, on a monthly basis, FB's global reach for engagement of their products hits 2.32 billion people. When you put this into perspective, an argument can be made why Facebook is the best place to advertise as its reach is enormous. Facebook has really focused on expanding its brand globally and it is paying off. Over the past two years, FB's global reach outside of North America and Europe has increased by 417 million users. Since Q4 of 2016, Facebook has added 11 million monthly active users in the US & Canada, 32 million in Europe, 274 million in Asia-Pacific, and 144 million throughout the rest of the world.

(Source: Steven Fiorillo) (Data Source: Facebook Q4 Report)

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(Source: Facebook Q4 Report)

Focus on the numbers, not the noise part two - Financials

Every category of business comes down to numbers because at the end of the day math doesn't lie. Facebook continues to exceed all the major categories on the financial side. FB continues to impress on the revenue side. Q4 is FB's largest quarter for revenue which correlates to the holiday season and companies spending on advertising. Over the past two years, FB has almost doubled their 4th quarter revenue as it has increased by just over $8.1 billion. From 2016 Q4 to 2017 Q4, revenue increased by $4.16 billion and from 2017 Q4 to 2018 Q4 revenue increased by $3.94 billion. Facebook's year over year revenue from the close of 2017 through 2018 increased by just over $15 billion. A 37.4% increase in revenue over a one-year period tells me that Facebook is monetizing its users and still has considerable growth left in its tank.

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(Source: Facebook Q4 Report)

Facebook's net income continues to increase which means they are monetizing the revenue which is generated. Many companies can increase their revenue while they are growing but increasing their revenue while their net income grows at a healthy pace is a recipe for greatness. Over the past two years, the net income from Q4 2016 to the net income in Q4 2018 has almost doubled increasing from $3.57 billion to $6.88 billion. Over the past year, net income at FB has increased by 38.8% from $15.93 billion to $22.11 billion. FB is proving once again that they are able to sustain their growth trend and their business model quite profitably.

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(Source: Facebook Q4 Report)

The metrics from the slide presentation can be very insightful, but an analysis of the statements of income and balance sheets should always be conducted. When I look at the raw numbers on the statement of income, I want to see that the revenue is increasing in addition to the cost and expenses as well as net income. This means that a company is able to increase their internal investments to make the company grow while monetizing those investments by growing their net income. Over the course of 2018, Facebook has increased their costs and expenses of revenue by $10.48 billion. Those investments were able to be monetized as their revenue jumped $15.19 billion and net income increased by $6.18 billion over the same period. I think that the analysts who downgraded FB are nuts as this is what companies should hope to achieve in their respective business.

(Source: Steven Fiorillo) (Data Source: Facebook 2018 Statement of Income)

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(Source: Facebook Consolidated Statements of Income)

Facebook's balance sheet illustrates a beautiful picture and not a doom and gloom scenario. My #1 metric is total shareholders' equity as we always want this number to increase. I do not get concerned if total liabilities increase due to investments in the company as long as total assets outpace the rise in liabilities. Over the past year, FB's total liabilities have increased by just over $3 billion. While this is a large number, it is well warranted as the total assets increased by $12.81 billion and shareholder equity increased by $9.78 billion. The biggest takeaway from FB's liabilities is that they are missing something which almost every company has and that is short- and long-term debt. Facebook has generated enough revenue and income to pay for its growth organically without tapping the debt market. This is a feat that not many achieve and should not be taken lightly.

(Source: Steven Fiorillo) (Data Source: Facebook 2018 Consolidated Balance Sheet)

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(Source: Facebook 2018 Consolidated Balance Sheet)

Why there is still tremendous growth for Facebook's Future

Facebook generates 49.9% of the revenue from US & Canada which is their lowest market for daily and monthly active users. This is the key to Facebook's continued growth trajectory. The US & Canada region accounts for 12.2% of Facebook's daily active users and 10.4% of their monthly active users, yet, it generates just about half of their total revenue. This fact should get every analyst and investor excited as it indicates tremendous potential in future revenue and net income growth. FB's two largest user segments represent their two smallest revenue generators. While in most cases, this would be a failure, but in FB's case, it is a golden opportunity.

The Asia-Pacific region accounted for 40.8% of Facebook's MAUs and 37.9% of their DAUs, yet, they only generated 16.3% of their revenue from these users. The rest of the world accounted for 32.3% of FB's MAUs and 31.4% of their DAUs, yet, this geographic segment only generated 9.3% of FB's total revenue. The increase in revenue and net income potential in the Asia-Pacific and rest of the world segments presents an amazing opportunity for FB. If they can increase the revenue in these geographic segments while monetizing it, FB's overall revenue and net income could have long-term beneficial catalysts.

(Source: Steven Fiorillo) (Data Source: Facebook Q4 Report)

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(Source: Facebook Q4 Report)

Conclusion

I believe that the negativity around Facebook and the recent decline was unwarranted. FB's stock declined from 218.62 to 123.02 over a five-month period and none of it was based on solid information or numbers. Nobody can predict what will happen with regulation or a possible antitrust case and these "what ifs" should never outweigh the fundamental business of a company. FB is healthy and continues to grow in every relevant category of its business. It is in a great financial position and has no long- or short-term debt on its balance sheet. I believe that FB's stock will rise like a phoenix and the ascent has just begun. The US & Canada region accounts for 12.2% of Facebook's daily active users and 10.4% of their monthly active users, yet, it generates just about half of their total revenue as the recent fall should have never occurred.

Disclosure: I am/we are long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.