Facebook reported a great Q1’19 and the stock has climbed a wall-of-worry back to the $195 area. However, Facebook stock is still a buy.
To recap, investors have been concerned about the list of negative headlines out of Facebook regarding privacy issues. In addition, based on commentary I’ve heard from friends and FinTwit, there is a growing list of “I don’t even use Facebook anymore”. Nevermind the fact that social media is proving addictive…
I recently argued that, while I am concerned with the Facebook headlines, the core business of Facebook is doing fantastic. The arguments of “Delete Facebook” are understood, but completely anecdotal.
- Facebook is a dominant platform with >2.5 billion unique users
- Advertising via social media platforms is still in its infancy
- The ROI advertisers receive from using social media platforms is much higher than traditional methods, which will grow the advertising pie and should benefit the FB platform given how many users it has
- Expect high growth from FB as it monetizes Facebook and ramps Instagram, video, Whatsapp and FB messenger
So did Q1’19 help assuage investors’ fears? Certainly – take a look at the opening statement on the earnings call:
This was a strong quarter, and our community and business continue to grow. There are now around 2.7 billion people using Facebook, Instagram, WhatsApp or Messenger each month and more than 2.1 billion people using at least 1 every day
Even in Europe where GDPR hit, MAUs grew nearly 2% Y/Y.
It’s great that they have lots of eyeballs on their sites still, but is that translating into profitable growth? Yes.
The company is seeing the most growth from a user perspective and an “average revenue per user” out of Asia and the RoW. That is actually why I think Facebook has much more room to run. As ARPU’s for these segments converge to where the US and Europe are (which will take time) I think Facebook can reach $80BN of EBITDA by 2022. Given the company’s strong returns on invested capital, I think it warrants a premium multiple. But if the stock traded at 12x at that point (in-line with the median S&P multiple today), I think the stock can double from here.
Remember that WhatsApp today is still largely under-monetized, but has >1.5 billion MAUs. Facebook has plans to turn WhatsApp into a payments and commerce platform, which should drive strong returns going forward.
As of right now, the company has a large goodwill item on the balance sheet after buying WhatsApp for $19BN. Even so, the return on invested capital is extremely high. Facebook earns ~$0.40-$0.50 for every $1.00 it invests in year 1. This is extremely attractive and well above market average. Therefore, you could argue it deserves a premium multiple and my PT could be too low.