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

Facebook Inc. (NASDAQ: FB), social media giant is under pressure lately with few scams and softness in latest quarter performance while revenue growth has been flagged to drop by a high single digit percentage in remaining FY18. However, the company aims to mitigate the challenge-stricken position with efforts in other directions. The group has now announced to generate revenue from its WhatsApp business under its broader and long-term strategy. The group has slated to charge large businesses for delivering WhatsApp messages to respective customers. While some risks prevail, the group may benefit from its developing ecosystem that engulfs platforms including WhatsApp and Instagram, in the long-term.

Facebook to roll out new features: Facebook Inc. (NASDAQ: FB) intends to roll out new features that would show people the details on how much time they are spending on the apps, in coming weeks. The development is part of an ongoing effort to be more responsible with its community as people will be able to manage their time on these apps. Recent studies have shown that people who spend countless hours on Facebook and Instagram often feel more isolated, and they are more prone to anxiety and depression. The apps to be introduced is expected to include an activity dashboard that will reflect how long a person is spending time on Facebook or Instagram. There will be a daily reminder for when the person is hitting the total time for the day and there will be a way to tune out notifications. These tools can be accessed through settings pages and fall in line with CEO Zuckerberg’s vision to have "Time Well Spent" movement. Introduction to other changes for news feeds and avoiding any bullying or other offensive comments, come under the purview of group’s other efforts while response from the market is still mixed. Meanwhile, Instagram is expected to roll out similar features.


Facebook ARPU (Source: Company reports)

Facebook reverses ban on ads related with cryptocurrency: In a major development related with cryptocurrencies, Facebook has reversed their overall ban on some cryptocurrency related advertising. Facebook seems to be taking a different stance on cryptocurrencies now and has even indicated some work to develop its own internal blockchain team with significant opportunity expected to be unearthed. It looks that Facebook is taking a hard look at cryptocurrencies in the process. On the other hand, Google in March 2018 had banned the ads related with cryptocurrencies after Facebook, Chinese web giants Alibaba, Baidu and Tencent. Twitter had also confirmed that they will be banning private ads for cryptocurrency sales and initial coin offerings. Now the question is what Google and Twitter will do after Facebook’s move. Snap already allows cryptocurrencies ads but it bans ads for cryptocurrency ICOs. On the other hand, Microsoft, which owns search engine Bing, is one the biggest ad platform which will allow cryptocurrency ads. The company got $6.97 billion in advertising revenue last year. However, Microsoft-owned LinkedIn, has mentioned in its privacy policy that it bans ads related to the “sale of virtual currency.”

Launched two important ad transparency tools: FB has recently launched two important ad transparency tools. The first one is to let anyone see the ads any page is running, even if the ads are not targeted to the user. The second tool is an archive of ads with political or issue content starting in the US, which is to be used for the midterm elections. These ads are now labeled so that the user can clearly see who's paying for them. Further within the archive, the user can see the budget associated with each ad, how many people saw it, and search all ads with political or issue content an advertiser has run for up to seven years.  This level of transparency reflects increased accountability and responsibility for advertisers globally.


Advertising revenue by geography (Source: Company reports)

Soft Second Quarter 2018 Performance: FB has reported the adjusted earnings per share of $1.74 in the second quarter of FY 18, while the adjusted revenue rose 41.9 percent to $13.04 billion in the second quarter of FY 18. However, foreign exchange tailwinds led to over $370 million of revenue during the second quarter. But, ad revenue rose 42% year on year (yoy) to $13 billion, demonstrating a 38% rise on a constant currency basis. Moreover, FB brought in 1.47 billion global daily active users (DAUs) during its second quarter, while Global DAU rates rose 11% against pcp. FB also had 185 million North American DAUs and 279 million European DAUs. As per geographical performance, ad revenue in Europe as well as Asia-Pacific showed a fastest growth at 47% each and benefited from foreign exchange tailwinds. However, European ad revenue growth deceleration was more than other regions and was hurt by reduced currency tailwinds and, to a lesser extent, the roll out of GDPR. Mobile ad revenue rose 50% yoy to $11.9 billion, which represents over 91% of ad revenue. The average price per ad rose 17% while the number of ad impressions served across their services rose 21%, boosted by ads in feed on Instagram and Facebook. Payments and another fees revenue rose 23% yoy to $193 million. But total expenses rose 50% yoy to $7.4 billion, with the firm having over 30,000 full-time employees, which is a 47% yoy rise. The group incurred a Capital expenditure of $3.5 billion, on the back of investments in data centers, servers, network infrastructure, and office facilities. During the second quarter, they generated $2.8 billion of free cash flow and ended the quarter with over $42 billion in cash and investments. The group bought back over $3.2 billion of their Class A common stock during the quarter


Second Quarter 2018 DAU (Source: Company Reports)

Future Outlook: FB expects the revenue-growth rates to decline by high-single-digit percentages from prior quarters sequentially in both Q3 and Q4. On the other hand, the company has planned to hire 20,000 people to handle safety and security on its platforms in response to controversies such as use of Facebook to push fake news ahead of the 2016 U.S. election. The company disclosed that its head count has increased 47% to 30,275 since the year-earlier period, part of that outsize spending. Going forward for several years, the group sees their operating margins to be over mid-30s on a percentage basis as compared to the 44% operating margin during the second quarter. The group forecasts full-year 2018 capital expenditures to be over $15 billion, at the back of investments in data centers, servers, network infrastructure, and office facilities. They also see full-year 2018 total expenses to be in the range of 50% to 60% against prior corresponding period (pcp) due to rising investment in areas like safety and security, AR/VR, marketing, and content acquisition. Beyond 2018, the group sees the total expense growth to surpass revenue growth in 2019.


Operating Margins pressure (Source: Company reports)

Stock performance: FB stock has fallen in the last one week by about 20% (as of August 01, 2018) after the company reported lower than expected second quarter of 2018 performance as the slew of data leaks and fake news fiascos impacted the firm during the period. As a result, the company was below the mark with its sales and its global daily active users during its second quarter of fiscal 2018. Moreover, weak outlook by the firm also contributed to the decline. Facebook stock had already been under pressure due to the Cambridge Analytica scandal, which is one of several controversies and warning signs that the company had managed to weather with little damage to its stock. Therefore, FB is investing a lot in security that is expected to significantly impact the company’s profitability in near term; however, long-term potential can be considered along with the recent fall in the stock price as a buying opportunity. This trading level in light of guidance has made the stock still be in an undervalued range. The group’s ROE has also been 6.5% as at June 2018 and has been above industry median of 0.7%. We give a “Buy” recommendation at the current price of $ 171.65.
 

FB Daily Chart (Source: Thomson Reuters)

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