Company Overview: Facebook, Inc. is focused on building products that enable people to connect and share through mobile devices, personal computers and other surfaces. The Company's products include Facebook, Instagram, Messenger, WhatsApp and Oculus. Facebook enables people to connect, share, discover and communicate with each other on mobile devices and personal computers. Instagram enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends. Messenger allows communicating with people and businesses alike across a range of platforms and devices. WhatsApp Messenger is a messaging application that is used by people around the world and is available on a range of mobile platforms. Its Oculus virtual reality technology and content platform offers products that allow people to enter an interactive environment to play games, consume content and connect with others.
 

FB Details

Initial panic selling due to Privacy Scandal is slowly subsiding: Facebook Inc. (NASDAQ: FB) has been dealing with a large data breach issue in the last couple of weeks. The issue also impacted the market at large, based on a New York Times report that Cambridge Analytica gained unauthorized access to data from more than 50 million Facebook users (later reported to be 87 million users). Though management said that the data was improperly shared rather than hacked; the investors feared for more data security concerns, which could affect the company's bottom line negatively. As per Cambridge University’s psychology professor Aleksandr Kogan, he got the data from Facebook users through an app he created called “thisisyourdigitallife”. FB users used the app to fill out a questionnaire to create a psychological profile. The app also gave access to not only each user's Facebook profile, but to user’s friends as well. Meanwhile, this data was reportedly then shared without Facebook's permission with Cambridge Analytica, a private company which worked to develop Facebook ads for President Donald Trump during the 2016 campaign. Overall, the incident is considered to be FB’s massive data breach and more than 2 billion global users expressed about their growing concern. It is worth noting that FB’s data is critical for its advertising business, which accounted for $12.78 billion of FB's $12.97 billion in total revenue in the most recent quarter. Meanwhile, FB shares have fallen significantly since the news about Cambridge Analytica data breach was revealed last month. However, the initial panic selling has subsided, and the short-term volatility has fallen from its peak on March 29, 2018. In fact, FB stock has recovered after Facebook Chief Executive Officer, Mark Zuckerberg assured investors that he sees no meaningful impact from the scandal and its aftermath.

Security steps & CEO succeeded in reassuring investors with his testimony before Congress: FB has about 15,000 people working on security and content review, which will rise to more than 20,000 by the end of 2018. Further, FB has backed proposed legislation requiring social media sites to disclose the identities of buyers of online political campaign ads and introduced a new verification process for people buying “issue” ads, that do not endorse any candidate but have been used to exploit divisive subjects such as gun laws or police shootings. The steps are designed to deter online information warfare and election meddling in the US. The company has also laid off more than 270 accounts and pages operated by the Russian organization, Internet Research Agency (IRA), which was allegedly involved in influencing the 2016 U.S. presidential election. It also suspended two more data analytics companies, namely CubeYou and AggregateIQ over unauthorized handling of user data. While the CEO’s own data has fallen into the hands of Cambridge Analytica and this raised concerns on the ability to protect information from parties seeking to exploit it, the company’s privacy changes and improved visibility are being focused on to help move past the recent controversies. Further, Facebook’s Chief Executive, Mark Zuckerberg has succeeded in reassuring investors with his testimony before Congress, while the testimony was reported to continue before the House Committee on Energy and Commerce. The FB official has confirmed that the company had hired a team from the law firm WilmerHale and outside consultants to help prepare Zuckerberg for his testimony and how lawmakers may question him. Additionally, FB has taken a number of initiatives to make its social media platform free of malpractices, which will help restore the stock's trustworthiness. Furthermore, FB is investing in Artificial Intelligence to help achieving this goal. Looking at the privacy issues at large, Europe will be taking a major step in protecting user data on FB and other social media platforms by implementing the General Data Protection Regulation that is aimed at giving users more control over their personal data.

Competitive Advantage: As evident from the above, Facebook has witnessed a major issue; but it is worth noting that almost all major IT groups, such as Yahoo, Amazon, eBay etc., have faced similar, or sometimes worse issues relating to private and financial details being misused or stolen. None of these companies, or others, were brought down as a result of private users' information being misused, and further operational and competitive weaknesses did not lead to the demise of businesses. Moreover, FB has a virtual monopoly in its sector and has 2 billion monthly active users, which is enormous. Moreover, FB has taken great strategic decisions, to buy globally dominant platforms WhatsApp and Instagram, and competing head to head with Twitter in celebrity, political and news segments through both Facebook and Instagram.
 

Revenue in Millions, by Geography (Source: Company Reports)
 
Continues to enjoy the support from long-term investors: FB is continuing to get the support of long-term investors. Recently, there has been a disclosure of Sequoia Fund buying a minor stake in the company, which shows the confidence of the long-term investors on the group. Further, in a letter to shareholders, the investment committee of the fund has mentioned that though Facebook has unquestionably committed sins for which it must now atone, but the committee believes it remains a far more competitively advantaged, economically attractive and faster-growing enterprise than the average American business.
 

Fourth Quarter and Full Year Performance (Source: Company Reports)
 
Overall business performance: The group had more than 2.1 billion people in 2017 using Facebook every month (as of December 31, 2017, reflecting an increase of 14% year-over-year) and 1.4 billion people using it daily. Their business rose 47% on a year-over-year basis to $40 billion. Given that watching video is just a passive experience, the group intends to focus on videos that encourage meaningful social interaction, and in Q4, they updated their video recommendations to meet other quality changes to reflect these values. They expect that these updates would decrease time spent on Facebook by roughly 5% in the fourth quarter. The group also made changes that reduced time spent on Facebook by an estimated 50 million hours every day to make sure that people's time is well managed. The group is also noting another important shift across the industry which is the growth of Stories. They forecast that Stories are on track to overtake posts and feeds as the most common way that people share across all social apps. That's because Stories provide a better format for sharing multiple quick video clips throughout the day. The growth of Stories would have an impact on how the group is building products including WhatsApp and Instagram, which are the number one and number two most used Stories product in the world. Beyond the video, they also have a long roadmap. These include smaller groups of friends and family and also larger communities where people connect around shared interests. On the other side, the goal of the marketplace is to connect people through commerce. More than 700 million people each month currently use Facebook to buy and sell things. They have launched marketplace in 30 countries last year, including 11 countries in the last quarter alone. In Messenger and WhatsApp, the group is working to give businesses more ways to communicate with their customers. They have launched a plugin for Messengers so that people can set a live chat with companies on their websites, and now more than 2 billion messages are sent between businesses and customers every month. WhatsApp recently crossed 1.5 billion monthly active users who are currently sending more than 60 billion messages every day.
 

Daily Active Users, in Millions (Source: Company Reports)
 
Stock Recommendation: While the enactment of the 2017 Tax Cuts and Jobs Act led to an increase in provision for income taxes by $2.27 billion and decrease in diluted EPS by $0.77 for both the fourth quarter and full year 2017, FB has a dominant market position in its sector with virtually no competition and capability to cover up the shortcomings. The company has taken great strategic decisions, which are of strong competitive advantage. Moreover, FB is taking strong steps to overcome recent data breach and establishing security checks. In addition, CEO Mark Zuckerberg has succeeded in reassuring investors with his testimony before Congress. Last week, Zuckerberg reassured investors that the Facebook data scandal has had no “meaningful” impact on either user behavior or advertiser buying. The company is also open to fair data regulations to protect users. Meanwhile, FB’s Return on Equity has increased from 19.8% in 2016 to 27.3% in 2017. The shares of Facebook lost over 10.5% in the last four weeks but recovered over 5.5% in this week. We believe the stock has more potential and based on the foregoing, we give a “Buy” recommendation on the stock at the current price of USD 166.32, ahead of its Q1 2018 Earnings release scheduled for April 25, 2018.
 

 
FB Daily Chart (Source: Thomson Reuters)

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