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) is the operator of a social networking website, that allows the people to communicate with their family, friends, and coworkers; and has been into the development of the technologies that allow the sharing of information, photographs, website links, and videos  through mobile devices, personal computers and other interfaces. FB stock is trading at $162.43, and has immediate support at $157.20 and resistance at $168.84. While investments are being made on a heavy side for managing security and safety related issues and will be impacting free cash flows in full year 2018, the group aims to be back on track by next financial year and beyond given other developments and growth drivers. The group has also maintained its ROE and ROIC over the last six months. While EPS is expected to be on a sluggish mode but the group may report a double digit EPS growth over next five years against a triple digit growth seen earlier, given the narrative of heavy investments. Operating margins that were maintained over 40% lately are expected to take a dent but are still estimated to be over 30% while the group aims to buck up on innovation and platform development front.


Financial and Operating Parameters (Source: Company Reports and Thomson Reuters)

Instagram back up after worldwide outage: Facebook Inc's photo-sharing social network Instagram working got affected on Wednesday (as on 3 October, 2018) for the users across several cities, including London, San Francisco and Singapore. DowDetector's live outage map was showing the parts of North America, Europe, Australia, India, Singapore and other countries that were facing issues with the service. The users on Twitter complained about the outage and tweeted the messages along with the #instagramdown hashtag. The app had displayed an error message showing "couldn't refresh feed", while its website did not load for users. This  global outage had come after Instagram announced on Monday that its long-term insider Adam Mosseri will take over as the new head of the photo-sharing app, which is a week after its co-founders resigned. The mobile app has more than one billion active monthly users, and have grown by adding features such as messaging and short videos. However, Instagram is back up for some users after suffering a worldwide outage on Wednesday only. Now, the mobile app and the website, that were temporarily down, are back up and users could now post pictures and videos on to their feed.

Concerns around Mark Zuckerberg’s leadership: FB’s board has faced several proposals of the shareholders that is expected to dilute Mark Zuckerberg’s power, either by removing him from chairmanship or reducing his voting control. The company has been facing crisis after crisis, right from the spread of misinformation on its network to the leakage of data and the departure of Instagram executives. Facebook has very recently announced its worst-ever hack, in which the hackers were able to gain full access to the FB’s accounts of about 50 million users. Meanwhile, Zuckerberg in the beginning of the year had spent hours testifying before Congress and the European parliament. He had answered questions on data privacy after a separate scandal was in picture that involved the user information being transferred to Cambridge Analytica, which is a political consultancy. He had apologized for the lapse and was working to get back the user trust. Those efforts were hampered by last week’s attack, which has once again exposed the vulnerabilities in Facebook’s software. Meanwhile, many shareholders still have faith in Mark Zuckerberg and consider him to be the apt leader to handle things and lead the company.

Facebook launched tools to manage bullies: FB plans to launch new tools and programs to fight the bullying and harassment users would run into online. The tools will provide people to "better control unwanted, offensive or hurtful experiences on Facebook. Further, the company will be introducing a way for users to hide or delete multiple comments at once from the options menu of their post. The feature will be rolled out on desktop and Android and this new feature will be available on iOS in the coming months. The company is also testing different ways to more easily search for and to block offensive words from appearing in comments. Meanwhile, FB during the second quarter had launched two important transparency tools related with ad. In the first one tool, anyone can see the ads on any page that are running 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 that are related with the U.S. that is ready for the midterm election.

Launched IGTV in the second quarter: FB in the second quarter had launched the feature IGTV. Currently, the people are watching less TV, but more video. However, the videos generally are not optimized for mobile. IGTV will be able to help solve that problem. This feature is designed specifically for mobile and makes watching long-form vertical video from creators easy. Then there is a stand-alone IGTV app, but the user can also watch within the Instagram app, so that means the entire Instagram community has been able to use it from the start.


Average Revenue per User (Source: Company Reports)

Started off implementing the basic Stories format: Stories is a big part of the future of sharing too, and currently they're growing quickly across WhatsApp, Instagram, Facebook and Messenger. While the company started off with just implementing the basic Stories format, FB is aiming to move well beyond it, and has built lots of new features like polls, questions, and collaborative stories and groups and events. The company is also making progress to develop Stories into a great format for ads. In the second quarter, the company has started testing Stories ads on their platform too.

Mixed Second Quarter 2018 Performance: FB stock was 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 market’s 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’s 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 the forecasts of 185.4 million and 279.4 million respectively. Additionally, in the second quarter, in terms of ad revenue by region, Europe and Asia-Pacific both had grown fastest at 47% each and had benefited from foreign exchange movements. In the second quarter, the average price per ad has risen by 17% and the number of ad impressions served across the services grew 21%, primarily by ads in feed on Instagram and Facebook. Capital expenditures were $3.5 billion in the second quarter, on the back of investments in data centers, servers, network infrastructure, and office facilities. In the second quarter, the company has generated $2.8 billion of free cash flow and ended the second quarter with approximately $42 billion in cash and investments. Further, in the second quarter, the company has bought back approximately $3.2 billion of the Class A common stock.


Second Quarter 2018 Financial Highlights (Source: Company Reports)

Future Outlook for 2018 and beyond: The total revenue growth rate had declined by approximately 7 percentage points in the second quarter compared to the first quarter. The company’s total revenue growth rate is expected to continue to fall in the second half of 2018, and the company expects the revenue growth rates to decline by high-single digit percentages from prior quarters sequentially in both third quarter and fourth quarter 2018. FB expects the full-year 2018 total expenses to grow in the range of 50% to 60% compared to last year. In addition to increases in core product development and infrastructure, this growth will be on the back of increased investment in areas like safety and security, AR/VR, marketing, and content acquisition. Looking beyond 2018, the company expects that the total expense growth will exceed revenue growth in 2019. Over the next several years, the company expects the operating margins will trend towards the mid-30s on a percentage basis. FB expects the full-year 2018 capital expenditures will be approximately $15 billion, due to investments in data centers, servers, network infrastructure, and office facilities. The company plans to continue to grow capital expenditures beyond 2018 to underpin global growth and the company’s ongoing product needs. FB expects full-year 2018 tax rate to be in the mid-teens, but the company’s third quarter tax rate is expected to be in the range of 25% to 30% due to a one-time charge related to a recent court ruling in the IRS versus Altera case. Meanwhile, FB has planned to continue to invest heavily in security and privacy, while there will be impact on the profitability of the company.


Operating Margin (Source: Company Reports)

Stock Recommendation: In the second quarter 2018, FB has reached a milestone with now more than 1 billion actives on Instagram. Instagram grew more than twice quickly by using FB’s infrastructure. Further, FB continues to invest heavily in security and privacy because the company has the responsibility to keep people safe. 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. As a result, due to increased investment in security, the company has chosen to decrease their investment in new product areas. Over the next five years, the company is focusing to build the business ecosystem around messaging on WhatsApp and Messenger. The stock has fallen over 25% from its peak and looks cheaper in terms of valuation. It is worth noting that the daily trend has seen prices below the 200 day, 50 day, and 20 day moving averages and with earnings gap already considered into picture, new support levels may take a shape while latest support at around $159 has been maintained. While anticipations for a double bottom around $150 have been made, but it lately jumped back to over $160 defying the low levels. While risks prevail, the group is still capable of generating significant revenue from its arms, such as Instagram in year 2019. We have a “Buy” recommendation at the current price of $ 162.43, ahead of the Facebook Q3 2018 Earnings result due around October 30, 2018.
 

FB Daily Chart (Source: Thomson Reuters)

 
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