Facebook (FB): An In-depth Analysis of an Undervalued CompanyIn this post, I’ll be providing an in-depth analysis of Facebook (FB), which was part of FAANG (Facebook, Amazon (AMZN), Apple (AAPL), and Google (GOOGL)), leading the stock market since the financial crash up to 2019, before it was replaced by MAGA (Microsoft (MSFT), Amazon, Google, and Apple).
I'll be exploring its business models, financials, weaknesses and threats, the technical analysis of the stock, and my final outlook on the company.
Facebook has been under scrutiny for a while, due to issues regarding: fake news scandal regarding the US presidential elections, the violation of data protection laws in Europe, and advertisement boycotts.
However, it seems that Facebook is ready for another run as a high-potential growth stock, through its diversification in business models and streams of revenue.
Business Models
1. Target Advertisements
Based on its tremendous number of users, Facebook has its strength in targeted ads. The ads provided through facebook are optimized through their algorithms, allowing Facebook to receive more money for ads compared to its counterparts. There was a time when Facebook’s ad revenue went up by 50% every year, but growth has slowed down to 10% a year. Nevertheless, based on the recent increase in users, there is huge growth potential as Facebook seeks to advertise in the field of gaming and e-commerce.
2. Increase in users
Facebook is another company that benefited from the Corona Virus (COVID-19) pandemic. Its user base increased significantly; FB’s daily active users (DAU) increased by 13%, and monthly active users (MAU) by 12% compared to those of last year. Considering the fact that Facebook’s user growth rate was at a single digit, the increase in number of users demonstrates strong growth potential. With the number of advertisers at 9 million, despite the boycott, Facebook will be able to capitalize on ad demand from mid-small sized companies.
3. Family Applications
Facebook owns other family apps such as: Instagram, Facebook Messenger, and Whatsapp. The monthly active people (MAP) for all these applications combined is at 3.14 billion, which makes Facebook the most used social application excluding China. The DAU and MAU for the family applications have also increased by 15.4% and 13.8% each compared to those of last year.
4. E-commerce
In August 25, Facebook added a ‘Facebook Shops’ tab on the explore page, allowing users to directly purchase goods. This feature is also available on Instagram as well. This indicates significant growth for Facebook, as it incentivizes users not to open their own shops on Shopify or Amazon, but to open a shop directly on Facebook, which can provide a products page that is optimized for a mobile experience. Considering that the e-commerce landscape is changing to a D2c (directly to customer) format, Facebook and Instagram can easily be the largest market share holder. Also through the use of Facebook messenger, communication between the buyer and the seller is much easy, and live shopping, in the form we have seen in Instagram, is being tested as well.
5. Mobile Payments
Whatsapp is launching a service in Brazil, offering payments that could be made to purchase goods, or wire someone money. Consumers can use this service for free, but companies have to pay a 3.99% fee. In the near future, we’ll see people purchase goods directly from Instagram and Facebook, and as such, Facebook has partnered up with e-commerce corporations such as Shopify (SHOP) and Big Commerce (BIGC).
6. Gaming
Facbook’s market share in live game streaming has been showing a steady increase, and creating a creator community. They also have strength in the AR/VR gaming industry, as they have acquired the VR headset company oculus in 2014. The growth in revenue of these gaming devices mark a 40% yoy growth. Facebook’s diversification in the gaming industry will also provide them an opportunity for growth.
Financials
- Facebook generates 98% of its revenue from advertisements
- Their ad revenue was less than $20 billion in 2015, but has since grown exponentially to about $70 billion in 2019.
- While their gross margin percentage has been declining since 2017 due to traffic acquisition costs, it’s still close to 82%.
- Facebook’s cash generation from operations demonstrates phenomenal numbers.
- FB is a cash generating machine, and heavily reinvests that capital back into R&D, marketing, and infrastructure.
- FB is free cash flow positive, with over $20 billion in 2019.
- This means that the company has enough cash on hand to repay creditors and issue dividends to shareholders.
- 71.6% comes from Facebook ads, 25.2% comes from Instagram ads
- Facebook’s 2020 Q2 ad revenue exceeded expectations. While the cost of advertisement reduced by 21%, with the increase in user traffic, ad revenue increased by 10.2% compared to last year’s quarter, marking $18.32 Billion.
- Overall, Facebook demonstrates extremely healthy financials with a mix of steady and exponential growth in their earnings
Technical Analysis
- To begin with, we can first see that the daily chart is testing the 20 Simple Moving Average (SMA) and the 0.236 Fibonacci retracement resistance
- The SMAs are aligned in the order of – 20, 60, and 100 – indicating that the overall trend is an uptrend
- Prices have entered, and bounced on the Ichimoku Cloud support
- Counting Elliott Waves, we can see that an Impulse Wave Count (12345) has played out since the drop caused by the pandemic, and that we are going through a small phase of correction, potentially counting an Elliott Corrective Wave (ABC).
- While a corrective move down to $220 levels around the 0.5 Fibonacci retracement support is possible, it’s not yet probable as significant support levels have not been broken yet.
Weakness/Threats
- Facebook is exposed to the threat of regulation risks regarding laws of personal information protection.
- While Facbook aims to combine all its family apps for synergy, measures will the taken by the government to regulate such efforts, to prevent monopoly.
- Apple’s new IOS 14 policy made it difficult for app developers to advertise their product on Facebook, and it’s expected that Facebook’s 2020 Q4 earnings will be affected by it.
Final Outlook
Overall, Facebook is a big corporation that still has huge growth potential by diversifying its business model. Facebook’s strategy to lock up users within their platform, install shops, and ultimately grow into a payment platform is extremely ambitious yet totally possible. While most people know this company, they are overlooking the growth potential it can achieve, and thus, this stock would be a gem for the long term outlook.
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