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), the social media giant, seems to be under pressure these days with public investigations and bleak second quarter results that sprayed a mixed scheme of performance. These with guided impact on margins in view of enhanced investments in data security, may have led to a sell-off but this looks unwarranted. Investment in Singapore data center and Instagram’s effort on a stand-alone shopping application are some of the key catalysts for future, signaling a potential upside in long term.

Outcome of the Senate Hearing: Facebook, Inc.’s (NASDAQ: FB) COO Sheryl Sandberg and Twitter CEO Jack Dorsey were scheduled to answer the questions on Capitol Hill from senators (lawmakers), who were investigating the Russian involvement in the 2016 presidential election. On Wednesday, both groups were grilled on social media and foreign influence campaigns, and as an outcome, it has been identified that the executives were defending their companies; and this led to a significant downfall in technology stocks across the globe. Meanwhile, no representative was expected from Google as the company’s committee found no one sufficiently senior to face the Senate; and Google is additionally dealing with foreign meddling in phishing attacks and on video platform YouTube. The company was also invited to send their top executive to appear before the Senate and face the questions. Meanwhile, the tech bosses of FB and Twitter were expected to show that they have been fighting Russian active measures, and have taken steps for internal security and other practices. This is the second time in this year that the intelligence committee has conducted a public session on how social media platforms like Facebook, Twitter etc. can be used to further foreign influence operations. The committee had also heard from social media experts back in August. FB had already announced in late July that the company has removed 32 accounts involved in a political influence campaign with links to the Russian government. Facebook was expected to face tough questions regarding the ongoing vulnerability of American voters. However, Senate aides said that the integrity of the upcoming U.S. midterms is just one item on their agenda. On the other hand, the hearing was expected to set an association with tech giants with regards to willingness to work with lawmakers on solutions. As per Facebook’s chief, Mark Zuckerberg, social network and internet firms are already in arms race and combined forces of the US private and public sectors are now required to protect country’s democracy from outside influence or interference.

Lawsuit Against BlackBerry For Stealing Voice-Messaging Tech: Facebook has filed a lawsuit against the Canadian device maker Blackberry in the U.S. District Court of Northern California. FB has accused BlackBerry related with the stealing of its voice messaging technology, which is among other patented processes that BlackBerry used in relation to how mobile devices can deliver video, audio, and graphics and how these devices analyze GPS data. Facebook is asking unspecified damages for infringement of six patents. This lawsuit has come after BlackBerry had sued FB in March for infringing on its mobile messaging patents, which as per the company Facebook had stolen to use in their own instant Facebook Messenger, WhatsApp Messenger, and Instagram. Meanwhile, BlackBerry has not yet publicly commented on FB’s lawsuit.

Launched two important transparency tools: FB during the second quarter of the year launched two important transparency tools related with advertisement platform. In the first tool, anyone can see the ads running on respective pages even if the ads are not meant for the person and the other tool is an archive of ads with the political or any issue content related with the U.S. at large. The company has labelled these ads and can clearly see who is paying for them and, within the archives, one can see the budget associated with each ad, how many number of people saw it, and search option with all ads with political or issue content that an advertiser has run for up to seven years. These provide for increased accountability and responsibility for advertisers globally. During the last year's French and German elections, the Alabama special election, along with recent presidential election in Mexico, Facebook systems had found and removed thousands of fake account pages and groups that violated the company’s policies. FB will face real tests as over the next 18 months, there are important elections beyond the U.S. in Brazil, India, and the EU and the company is confident of passing these tests. During every election FB is improving, constantly evolving and making progress in the fight against misinformation. The company is getting away of the financial incentives for spammers who create fake news, most of which are economically motivated. FB has stopped pages that repeatedly spread false information from buying ads. The company is also using Artificial Intelligence to prevent fake accounts that create a lot of the problematic content. The company’s investments in AI reflect that the company is in a suitable position to remove more bad content quickly because the company does not have to wait until after it's reported. As a result, it frees the reviewers to work on cases where human expertise is required to understand the context or create a problem situation. Meanwhile, in the first quarter of 2018, almost 90% of graphic violence content were removed or warning label was added to the one identified using AI. This shift from reactive to proactive detection is a big change, and it will make FB safer for everyone.


Diluted Earnings per Share (Source: Company Reports)

Mixed Second Quarter 2018 Performance: FB stock has fallen after the company reported mixed results for the second quarter of 2018 due in part to the series of data leaks and fake news that had impacted the company during the quarter. The company has showed below the mark performance with its sales and its global daily active users during its second quarter of FY18. FB in the second quarter of FY 18 has reported the adjusted earnings per share of $1.74, beating the analysts’ estimates for the adjusted earnings per share of $1.72. The company had reported the adjusted revenue growth of 41.9 percent to $13.04 billion in the second quarter of FY 18, missing the market estimates for revenue of $13.23 billion. Moreover, FB brought in 1.47 billion global daily active users (DAUs) during its second quarter, which is below the 1.49 billion that analysts were forecasting. Global DAU rates have risen by 11% compared to the year-ago quarter, but they were still below what Wall Street was expecting. FB also had 185 million North American DAUs and 279 million European DAUs, slightly below expectations.

Second Quarter 2018 Financial Highlights (Source: Company Reports)

Outlook: FB has planned to continue to invest heavily in security and privacy, but it could impact the profitability of the company to some extent. The company has planned to decrease the investment in new product areas. FB expects the revenue-growth rates to decline by high-single-digit percentages from prior quarters sequentially in both the third quarter 2018 and the fourth quarter 2018. Over the next five years, the company is focused on building out the business ecosystem around messaging on WhatsApp and Messenger. Moreover,  stories continue to be a big part of the future of sharing too, as they're growing rapidly across WhatsApp, Instagram, Facebook and Messenger. FB has started off just implementing the basic Stories format and have built lots of new features like polls, questions, and collaborative stories and groups and events.


Expenses as % of Revenue (Source: Company Reports)

Stock Recommendation: In the second quarter 2018, FB reached a milestone with more than 1 billion active hits on Instagram. Further, FB is working to make their platform for people and businesses through new applications. FB has taken strong steps to combat a number of issues, that comprise of election integrity, fake news and protecting people's information. The company has increased transparency because transparency leads to greater accountability. Further, the advertisers that place ads with political content are now required to verify their identity and location. These ads will be labeled with a disclosure of the person or entity who has paid for them and saved in a searchable archive. The group’s ROE has improved significantly over the years and is well above the industry median of about 3.2%. With certain slowdown, the earnings per share are still expected to be on an uptrend and to enhance intrinsic value. We have a “Buy” rating on the stock at the current low level of $ 167.18 (down 2.3% as of September 05, 2018), which still looks to be an attractive price.

 
FB Daily Chart (Source: Thomson Reuters)

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