In the eve of Facebook’s (NASDAQ: FB) Q416 earnings announcement, what don’t you like about FB?
Facebook practically invented the term “social media.”
Although we often heard that the youngest generation refuses to use Facebook simply because their parents are using it, Facebook shareholders never mind the insane user growth rate near 1700% over a short 7-year period. At the end of 2016, it is estimated that there are over 1.7 billion Facebook users.
Facebook’s founder Mark Zuckerberg practically invented the term “monetizing.” With a brief moment of growing pain, Facebook has been able to grow its advertising revenue by an insane 40% per quarter consequently for the last 20 quarters.
The next game changer is that Facebook will benefit most from the mobile trend which drives ecommerce. By some estimates, online spending accounts for 20% of mobile use, while 50% is for digital media consumption. Mobile use per day has jumped from 25 minutes in 2013 to 3 hours and 6 minutes per day in 2016. In Q316, 84% of Facebook’s ad revenue ($15.2/18.2 billion) came from mobile ads. Revenue for 2017 is cautiously and realistically guided lower, so it is easier to meet. Of course, key numbers to watch for are always user growth and ad growth. Introducing new “mid-roll advertising” is another way to engage users, and will increase ads revenue. Growth drivers are still intact by using Instagram for video ads and monetizing FB Messenger and Whatsapp. As margins rose from 26.7% in 4Q15 to 33.9% last quarter, earnings are expected to double in 2016.
After billions of public and private funds were funneled into Virtual Reality (VR) in 2016, VR still needs a variety of applications to draw in a large consumer base. Yet, no one VR application can drive mass adoption which requires completely wireless at lower prices, simpler, and standardized, and standardization. VR/AR tech is expected to generate $120 billion by 2020.
Zuckerberg envisions all future social interactions in virtual reality. He believes that “Virtual Reality is a virtual reality.” To this end, Facebook purchased Oculus for $2 billion in 2014, spent another $250 million in VR R&D, set aside $250 million for future R&D, and $50 million for mobile VR content.
Mark Zuckerberg has successfully transformed himself from being Steve Jobs to Tim Cook. Less than 18 months after Facebook’s IPO, he was nearly ousted out of the Board of Directors from the pressure of the public capital market, for failing to monetize advertising income. The stock dropped to 50% of its IPO level. However, the same stock nearly doubled within the subsequent year as he was able to switch gears and convert a vision into bankable revenue.
Remember those kids switched to Instagram, WhatsApp, and Snap because Facebook is not “cool” anymore. After kids’ parents became Facebook new users. Facebook went ahead to buy Instagram, WhatsApp, and Snap.
In fact, one of Zuckerberg’s best leadership traits is that he is able to “franchise” his success story. Maybe the most impressive success story in the history of acquisitions is Facebook’s buyout of Instagram. In 2012, Zuckerberg bought Instagram for $1 billion, albeit controversial, it is valued at $35 billion in 2016.
In 2014, he purchased WhatsApp for $19 billion. Today, WhatsApp looks to access emerging markets where internet connectivity isn’t widely available. It has grown from 450 million users to over 700 million with 70% active daily users, compared to Facebook’s 62%.
In 2013, Zuckerberg attempted to replicate Instagram’s success by offering $3 billion for Snapchat Partners and failed. The new Snap Inc., the most anticipated tech IPO in 2017, is valued at $25 billion.
More than just his relentless pursuit of success, he is able to execute his visions effectively. Yahoo made a $1 billion bid on Facebook in 2006, and the entire management team quit when Zuckerberg turned the offer down. In 2016, Facebook, at $347 billion, is traded at close to 3.5 times its IPO price just 5 years later.
In addition to Steve Jobs’ philanthropic, unapologetic, and demanding, Mark Zuckerberg is also described as passionate, purposeful, personable, and innovative.
I can’t imagine if Facebook shareholders have anything to complain about. Since its IPO in 2012, Facebook has returned 246% to their shareholders, compared to Apple’s (NASDAQ: AAPL) 76%, and 94% for the S&P 500. Except for the brief 6-month period after its IPO, there is virtually no chance of not making double-digit annual returns for Facebook shareholders, regardless of your entry point.
The so called “misreporting metrics” problem stems from issues with Mobile App and Graph API showing different results Facebook Live reactions. In particular, “Page Insights” or “Viewers Reached” would not remove repeat visitors from calculation. As a result, average time spent reading articles over-reported by 7-8% and traffic was underreported by 10-20%. The end result is to mislead advertisers on viewership or success of their advertising. Even though none of these were done nefariously, it puts all of Facebook’s data and metrics into question.
To be fair, Facebook came out and admitted problems willingly and worked to fix them by bringing in more third party verification for their data. If anything, this emphasizes Facebook’s leading role in big data and marketing. They currently have over 3 million active business advertisers. It is still uncertain though, how would more accurate data deter future advertisers?
Facebook needs to face the immediate political headwinds. In addition to the pressure of repatriating foreign revenue and capital, it is rumored that Trump threatened to eliminate H1B visa which allows foreign students in U.S. higher education institutions to stay and work in the U.S. It is estimated that 75% of Silicon Valley workers are foreign born.
That being said, all the risk mentioned above appears transitory to the long-term integrity of Facebook’s impeccable business model.
Long or Short
Unlike Apple versus Samsung (OTC: SSNLF), IBM (NYSE: IBM) versus Microsoft (NASDAQ: MSFT), Wal-Mart (NYSE: WMT) versus Target (NYSE: TGT), there is no one versus Facebook. Given the fact that Facebook has an uninterrupted super growth track record to prove its disruptive business model, it seems pointless to speculate if Facebook beats the Q416 earnings at this point.
As for the short side of the story, I don’t have one.
You should own Facebook, not trade it.