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Oh Mr Zuckerberg

You've probably seen the news at Facebook. The stock is down 20% in after hours trading (after hours volume is notoriously thin so we’ll see better indications tomorrow). Why?

  • User growth was less than expected
  • Revenue growth revised down in 2H 2018
  • Expenses up
  • Missed (only slightly but there’s little margin for error with a stock like FB) advertising revenue target
  • Headcount up 47% YOY

•  Some negative comment about the EU privacy regs General Data Protection Regulation (GDPR…expect to hear more of this) where they lost 1m subscribers due to the new rules.

•  Quotes from the transcript (here) that probably didn't help:

  “…deceleration in ad revenue growth, kind of consistent with the trends we've seen” CFO

  “…because the effective levels of monetization in Stories [videos and photos with a story; disappears in 24 hours] are lower.” CFO

  “We're being very slow and deliberate with monetization [with Messenger]” COO

  “But we won't know for a while if it's going to monetize at the same rate [when FB places stories across Messenger, Facebook and Instagram]”. COO

  “[Europe monthly average usage (MAU) was down] On Europe, yeah, we don't have any update on trends. We had indicated in the first quarter that we would expect to see a decline. We're not providing any guidance on MAU and DAU in Europe on this call.” CFO

Short term:

Some of the +30% growth days must be numbered. This is a stock that's under regulatory scrutiny but, unlike Google, the facts aren't known yet. There wasn't one reason for the miss…just lots of small ones such as privacy, currency, new ad formats etc. Since 2013, revenue and expenses have “beat” (i.e. been better than forecasts) by 5% to 7%. This time they missed by 1% and 2%. So, that's new for them.

Cash Fortress

FB has a very strong balance sheet. More than $50bn in cash which is half the balance sheet. Operating margins dipped but are at still at 44%.

Bull case:

  • new products
  • management tends to guide low
  • mobile ad volume
  • ad pricing
  • not overly expensive

Bear case:

  • regulatory problems will grow
  • slower growth
  • expenses higher
  • opting out/privacy issues

Bigger picture:

We’ve written about the FAANGs a fair amount in recent blogs. They’re big, profitable and growing. But there are high expectations around the stock and it sells at 75% more than the market and 85% more than Apple.

It’s one reason why we like small cap and the dividend Aristocrats. They lag when Big Tech is on a run but they're less likely to have a big sell off.

Action: Many clients have low cost positions in FB, so selling is not always an option. The stock is not going to crash. It’s a 20% correction so needs a 25% increase to break even. We'd certainly trim where possible if only for diversification reasons and we can help on that. Also, if you have tax gains elsewhere, or want to create a loss to offset some current income, we can help on that too. But otherwise it’s a HOLD.

If there’s more, we’ll include it in the blog. If you need more, please let us know.


High ROE, EPS growth of 40% and large cash position

 --Christian Thwaites, Brouwer & Janachowski, LLC

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