Keeping people connected during times like these is extremely crucial. Companies like Facebook (FB) have seen massive growth in user activity and are taking advantage of the situation. Facebook has made it its core mission to help people stay in contact while not being able to meet in person. Q1 2020 results showed just that, as the company beat on both EPS and revenue. I believe the stock was unfairly punished with the rest of the market when it collapsed in early March, sending shares down 40%. The proof of harsh overreaction has been the V-shaped recovery we have seen in the stock since it bottomed on March 18th. FB stock is up 50% and counting since then.
(Source: Google Images)
Anyone who uses Facebook has probably seen the COVID-19 information center. This is loaded with authoritative information from health officials and governments with messages encouraging people to stay home. More than 2 billion people are using it. While doing this, the company has also been actively taking down "Fake News" with regard to potential cures such as chugging water. Facebook has used warning labels on questionable material and seen incredible success, stating that 95% of the time someone sees one of these labels, they do not click on the link. Some will disagree that this is effective and even question "free speech", but there is a lot of bad information out there, and Facebook is doing its best to protect people from potentially harmful information.
Thanks to COVID-19, there are now more than 3 billion people actively using Facebook, Instagram, WhatsApp, or Messenger each month. Messaging volume has blown up more than 50% in some of the COVID-19 hot spots as people stay connected as best as they can. The company noted that it has seen time in group video calling increase by more than 1000% throughout March. The company noted that they know this is a surge, and not sustainable long term, but it is doing what it can to grow the business in light of the tough global situation. I would fully expect this surge to last longer than some anticipate, as business will continue to be conducted more online than in person for the foreseeable future.
(Source: Company Presentation)
There is no question live video is extremely valuable right now. Facebook recently announced Messenger Rooms. Similar to other video conference companies/models, one can create a room for any event and invite friends or co-workers. The benefit to Messenger Rooms is that it does not have to be a "scheduled call". It can happen at any time without any pre-planning, if the users so wish.
Because of the COVID-19 impacts, people are turning to Facebook and Instagram for businesses. Companies are taking advantage of the free options on both Facebook and Instagram. They are much quicker and more user-friendly than setting up an entire website, especially for small businesses. There has been an uptick of "live" streams as companies take advantage of the increased online audience to showcase their business. The company is working on creating gift cards that can be used on Facebook or Instagram to support businesses. Facebook is working every day to try and make life easier for consumers, which, in turn, will make like better for small businesses.
How Were The Earnings?
On Wednesday night, Facebook noted in its earnings release that for Q1 2020, GAAP EPS was at $1.71, which beat by $0.01, and Revenue climbed to $17.74 billion, which beat by $520 million. Year over year, revenue jumped 18%, operating income rose 78% on the back of higher margins, and net income more than doubled. As expected and mentioned above, there was an 11% increase in daily users, mostly due to COVID-19. However, it is not all sunshine and lollipops. Facebook saw a "significant reduction in the demand for advertising, as well as a related decline in the pricing of our ads", especially over the last few weeks of Q1.
(Source: Company Presentation)
Due to Facebook's strong financial situation, it is able to continue to pay all of its employees, while 95% of the full-time staff work from home. Because the company leans so heavily on small businesses, it announced a $100 million grant program to help 30,000 small businesses around the world. Facebook is focused on getting cash into its hands as quickly as it can. Half the grants in the US are earmarked for women minority and veteran-owned businesses. This is not only a great PR move, but will draw more companies to use Facebook and Instagram well beyond the end of this crisis.
With regard to guidance, CFO David Wehner had this to say:
With the COVID-19 crisis like all companies we are facing a period of unprecedented uncertainty in our business outlook, certainly in the nearly eight years I've been with Facebook. We expect our business performance will be impacted by issues beyond our control, including the duration and efficacy of shelter-in-place orders, the effectiveness of economic stimuli around the world and the fluctuation of currencies relative to the US dollar. On the latter point alone, since the WHO declared COVID-19 as a pandemic, we have seen in the US dollar appreciate 5% relative to the foreign currencies we do business in. Given the increasing uncertainty in our business outlook, we are not providing specific revenue guidance for the second quarter or full year 2020.
I think this is a message we are going to continue to see from companies across the board as earnings season carries on. Facebook was able to offer up some early Q2 data that showed some stability in the first three weeks of April concerning ad revenue. This is down 17% from the year-over-year growth that was reported today, but the rapid decline has stopped. Until governments around the world start to lift lockdown restrictions, it is expected ad revenue will continue to remain relatively flat.
What Are The Risks?
There has always been some uncertainty behind Facebook's user numbers. Especially with regard to fake accounts. Because every person on earth can only have 1 account, there is obviously a cap on its user base. Social media is changing rapidly. There is always something new and exciting that the "kids" are using. Instagram is becoming less and less popular as the newer apps begin to capture the younger audience. As you can see below, growth has been slowing and will continue to slow in the coming years. Facebook has to do something to keep the new cycle of social media users engaged and using its apps, or it runs the risk of losing the battle. Facebook and Instagram do both currently sit atop the social media standings, but there will have to be continued updates to keep the youth engaged and away from other apps.
(Source: Data and Research on Digital for Business Professionals | eMarketer.com)
There is also the risk of further regulation with regard to targeted advertising. It is no secret that is how Facebook makes its money. There is no doubt that security and privacy are some of the consumer's largest concerns. I think there will be regulations rolled out that will change the advertising landscape. I do believe Facebook will be able to adapt and survive these changes, but there may be a slight headwind until the company can figure out ways around them. I am certain the company already has plans in place if/when stricter regulations come out, whether it be domestically or internationally.
What Does The Price Say?
Facebook has been nothing but a money machine for investors outside of 2018. Any sort of dip has been a buying opportunity. The stock went just about nothing but up from 2013 to 2018. At this point, we finally saw some volatility. Since 2018, the stock has fallen greater than 20% three times. It fell 25% in early 2018, 45% in late 2018, and 40% in early 2020. The following recovery has produced returns of 45%, 80%, and 50% respectively. The latter still on the way up.
Any investor who has bought the dip, trimmed on the way up, and rebought at the next dip has done very well. Had you bought in early 2018 and held through all the volatility, you would only find yourself up 5-7% today.
Looking at my favorite moving average (200-day moving average), we can see that it has been a key point for Facebook for years. Zooming in on the more recent years, we can see either clean bounces off of the moving average, turbulence, or gaps one way or another. The stock has crossed back over in a big way on the back of earnings. In a perfect world, I would love to see a retest or some sideways movement around the moving average while it still has a negative slope, but with the recent volatility, we may not get that right away.
If we do not see a 200-day moving average retest, keep an eye out for the $203 level. This has been a form of resistance over recent years. Facebook shot through this level, but just about, on the earnings news today. If it can hold this level, the stock may be off to new all-time highs in short order. This was the point of resistance in late 2019 before the stock leaped to set the current all-time high.
As you can see, based on Facebook's fundamentals and balance sheet, the company did not deserve to be hit near as hard as it was. I believe the true buying point was well before earnings during the dip, as I mentioned above, but it is encouraging to see the actual data instead of just speculating. Facebook is a company that is not going anywhere and continues to grow its user base. It will continue to pump out new technologies and grow revenue. Shareholders should continue to have faith in the company long term. Keep buying the dips while Facebook takes advantage of a crummy situation.