Facebook: Lockdowns boost usage of social media giant
Facebook, the ubiquitous social media giant that owns other popular platforms such as Instagram, messaging system WhatsApp, and virtual reality player Oculus, derives most of its revenue from hosting advertisements on its own platform, Instagram, Messenger, and third- party affiliated websites or mobile applications. As part of the elite FAANG group, which is made up of the five most prominent American technology companies, Facebook is recognised for being at the forefront of innovation and trends in this sphere. Facebook performed decently in our portfolio with a 9.6% return in the past six months and outperformed the other three benchmark indices, the Dow Jones, S& P 500 and MSCI US which lost 9.7%, 5.2% and 4.7% respectively.
Facebook has had a rather mixed impact from Covid-19. Due to lockdown measures implemented by governments, the company reported a significant increase in the size of its user base and user engagement. However, governments and big corporations use Facebook as an alternative way to communicate; private businesses, too, use Facebook to reach out to consumers. Yet, this was offset by a significant reduction in the demand for advertising, as well as the rates that Facebook charges. Facebook also announced in its latest earnings report that it is making its applications more efficient and adding capacity, while also prioritising enhancements in key services such as real- time video experiences and livestreaming of games. This, along with additional investments into its data centre capacity, network infrastructure and office facilities, as well as scaling its headcount to address the pandemic, will drive expense growth for the rest of the year.
In 1QFY2020 ended March, Facebook reported results which were slightly better than analysts’ expectations. Compared to the same quarter a year ago, Facebook saw an 18% and 102% growth in revenue and net income respectively. Operating margins also improved strongly to 33% from 22% for the quarter. Other operating metrics also showed positive growth, with its daily and monthly active users growing by 11% and 10% respectively from a year ago. Facebook’s balance sheet is also very healthy, with a current ratio of 4.6 times and debt-to-equity ratio of just 10.3%. The company’s free cash flow yield is also relatively attractive at 3.4% compared to the risk free rate of just 0.7%.
Facebook’s recent US$5.7-billion ($7.9-billion) tie- up with Jio, one of India’s largest telecom companies, would serve well for its e- commerce strategy as Facebook plans to connect WhatsApp with JioMart, which is Jio’s small business initiative to connect millions of shops across the sub-continent. Analysts also expect Facebook to earn upwards of US$ 1 billion in e- commerce sales for FY2020 through its Facebook Shops and Instagram Checkout platforms. This should provide earnings visibility for the company, given the uncertainty of the impact of Covid-19 on the business, or even offset the expected losses due to the pandemic over the short term for the company.
Facebook appears to be fairly valued based on the consensus target price of US$243.31, which is very close to its current price of US$238.79. The company currently has 45 “buy” calls, five “hold” calls and three “sell” calls and we think Facebook is a good buy for investors looking for exposure in the tech industry over the medium and long term. Over the next six months, we estimate the upside of Facebook to be in the high single- digits. E