A Look at FB's 2016 3rd Quarter

Investment Analysis Clubs Saul’s Investing Discussions
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I thought Facebook turned in another great quarter earlier this week. You really, really have to look hard to find any faults.

Facebook had a wildly successful Q3, earning $7.01 billion in revenue and $1.09 EPS. That’s off of from 1.79 billion monthly users, up 16% year-over-year, and growing 4.67% this quarter, speeding up from 3.63% last quarter. Daily active users rose to 1.18 from 1.13 billion last quarter, and up 17% year-over-year. Facebook now has 1.66 billion mobile MAUs up 5.7% from 1.57 billion in Q2, and it’s hit a new billion-user milestone as it reached 1.055 billion mobile-only users.

Facebook destroyed analyst estimates, which were $6.92 billion in revenue and $0.97 EPS. Still, Facebook’s share price is down because it says it’s hitting maximum ad load, which will reduce revenue growth.

…

Though Facebook is now 12.5 years old, it’s still remarkably sticky, with 66% of its monthly actives using it daily, flat compared to 66% last quarter. That means despite all the worries about Snapchat, people aren’t using it fewer days per month.

Read more at https://techcrunch.com/2016/11/02/facebook-earnings-q3-2016/…

Here’s a look at their latest numbers:


Revenue (billions)	Q1		Q2		Q3		Q4
2013			1.458		1.813		2.016		2.585
2014			2.502		2.910		3.203		3.851
2015			3.543		4.042		4.501		5.841
2016			5.382		6.436		7.011		

EPS (non-GAAP)	        Q1		Q2		Q3		Q4
2013			0.12		0.19		0.27		0.32
2014			0.35		0.43		0.43		0.54
2015			0.42		0.50		0.57		0.79
2016			0.77		0.97		1.09

EPS (GAAP)		Q1		Q2		Q3		Q4
2014							0.30		0.25
2015			0.18		0.25		0.31		0.54
2016			0.52		0.71		0.82

2016 Q3 Earnings (Current):

Revenue Growth (billions)
2015 Q3 TTM Revenue = 15.94
2016 Q3 TTM Revenue = 24.67
Year Over Year Revenue Growth = 54.8%, previous quarter 51.4%

EPS Growth (GAAP)
2015 Q3 TTM Earnings = 0.99
2016 Q3 TTM Earnings = 2.59
Year Over Year GAAP EPS Growth = 162%, previous quarter 112%
GAAP P/E (Check Current Price) = 120.77/2.59 = 46.63
GAAP 1YPEG = 46.63/162 = 0.29

EPS Growth (non-GAAP)
2015 Q3 TTM Earnings = 2.03
2016 Q3 TTM Earnings = 3.62
Year Over Year EPS Growth =78.3%, previous quarter 64%
Non-GAAP P/E (Check Current Price) = 120.77/3.62 = 33.36
Non-GAAP 1YPEG = 33.36/78.3 = 0.43

Here are some of the other quarter’s highlights:

DAUs (Daily Active Users): 1.18B, +17% YOY
Mobile DAUs: 1.09B, +22% YOY
MAUs (monthly active users): 1.79B, +16% YOY
Mobile MAUs: 1.66B, +20% YOY
Cash and cash equivalents: $26.14B, previous quarter $23.29B, +12.2% sequentially

I have skimmed the conference call but have not read it closely yet. The stock price is down since the report primarily because of two things: 1) Management stated 2017 would be an “aggressive investment year”; and 2) In mid-2017 they would be lapping where they increased ad load on its flagship platform, making for harder comps. Facebook advised this owuld cause revenue and EPS growth slowdowns.

Facebook is hiring engineers, one of their primary “aggressive investments” right now. Zuckerberg said about 25% of their engineers are now working on AI-related projects. They are also hiring extensively for virtual reality efforts.

As one can see though, both the GAAP and non-GAAP PE ratios have fallen dramatically from a year ago due to Facebook’s stratospheric growth the past four quarters. It is now, I feel, extremely reasonably priced for the growth it offers going forward. Remember, it still has only begun advertising on Instagram and has barely begun any monetization with Messenger or WhatsApp.

Zuckerberg broke down three phases he wants to move Instagram, Messenger, and WhatsApp through over the coming years:

Instagram, Messenger and WhatsApp each have large communities, but we have a lot more work to do on all of them. I think about our progress here in three phases. The first phase is building a great consumer experience and getting it to scale. The second phase is about enabling people to organically interact with businesses. And then the third is to give businesses tools to reach more people. That’s how we build our business.

Zuckerberg then stated Instagram was entering the third phase, Messenger was in the second phase, and WhatsApp would be moving into the second phase next year.

All in all, I thought it was a terrific quarter, one where the guidance, taken within context, only got me more excited about the future of this company.

Matt
Long FB
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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Awesome write up, Matt!

I agree with you 100% on FB, one of my highest conviction stocks right now! I think it still has a large runway for growth.

I bought a small position after the IPO when it went under $20, and then have been adding significantly (for me) over the past year. Couldn’t be happier with the company’s and the stock’s performance.

Personally, I don’t even have a FB account, because I know I’d WASTE too much time on it that I don’t have. But I see how much it is used by the majority of the population! There is no way the people that use it could ever do without it. And it’s the middle age and older populations that uses it the most, the younger crowd doesn’t hardly use it (because their parents do). Regardless, they will be growing subscribers and revs/earnings for many years to come!

LONG FB

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Thanks for that write up on Facebook, Matt. Great report. Those are impressive numbers, but the market may not like the decrease in earnings planned for next year. I can’t imagine how AI is going to change our lives in the next 10 years.

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I’m long FB. Here’s a real life example of growing the user base. My daughter (born in 1980, so almost a millennial) was an uncommon FB user until this year when she gave birth to her first child. Now, despite being in a Master’s program at Columbia which taxes her time, she is considerably more active on FB. It’s truly a tool for friends and family to keep in touch - and sometimes more. Personally, after the election results, I intend on cutting back on the amount of time I spend on FB.

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Matt,

Great work as always. I’m just double checking with you what I saw in the CC – and that’s that FB didn’t give specific guidance? Is that just their M.O.?

Thanks,
Bear

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Hey Bear, thanks for the kind words.

…and that’s that FB didn’t give specific guidance? Is that just their M.O.?

From what I recall, Bear, they usually (or have in the past) forecast things like stock compensation, capex, R&D spending - that sort ofthing. I do not remember them forecasting exact numbers or ranges for things like revenue and EPS. Of course, I could be wrong, but that’s what I recall from their past calls.

I hope that helps.

Matt
Long FB
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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I’m considering adding to my FB position and I’m interested in hearing the bear case. Any takers? I’ll get you started.

Obviously recent results have been pretty much nothing but positive. See Matt’s awesome review of last quarter. But maybe the idea is that a slow down is inevitable? Law of big numbers? Profit margins so high they have nowhere to go but down? Ad revenue market has to slow at some point?

Maybe it’s simply that the market wants to let them grow into their 400B valuation. But it does seem they should command a PE commensurate with their stunning growth. The current 35 seems pretty dang affordable.

Thoughts?

Bear

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Bear, I will gladly give my bull case if you give me this weekend to get to it :slight_smile:

For now, I would like to point out that I don’t think FB’s future is all about ad load/revenue:

http://www.fool.com/investing/2017/01/15/investors-should-ta…

I will post more this weekend (maybe even tomorrow).

Matt
Long FB
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

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Haha, thanks Matt. You’re my go to for the Bull case. As far as other revenue streams, the tricky part may be figuring out how big they will be, and how profitable.

Saul, why do you think you never could get into FB for the long haul? I remember you saying it’s just not for you…is it just because you’re not a user and don’t care about the product?

Anyone else particularly bearish on it?

Bear

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Saul, why do you think you never could get into FB for the long haul? I remember you saying it’s just not for you…is it just because you’re not a user and don’t care about the product?

Yes, all of the above. I had had an inactive account, just in case I needed it, with nothing posted. Suddenly I started getting posts saying that half a dozen strangers, with odd Russian, African, or made-up names, had accepted my invitation to be Facebook friends. I unfriended them. I reported it, and suggested their system had been hacked. By the next day I had a dozen more. I made my account inactive. The next day there were lots more in spite of me making the account inactive. I had to finally close the account definitively. Facebook wouldn’t or couldn’t do anything about it. Coincidently, the wife of an elderly couple we know, told us that some young guys who said they were from Africa, had friended her on Facebook. I warned her they would be asking her for money. She said “Oh no! They just want to chat with someone in the US.” A week later she told us I was right. They started telling her they needed money for I forgot what, but a sob story. Now why would I want to invest a lot of money in a company like that? Is that the future of the world? Because a lot of young people like to post daily pictures on it?

I KNOW! It’s a stupid way to evaluate it, and I shouldn’t pick companies based on my own personal preferences, but it’s not for me.

Saul

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Saul,

Unlike you, I’ve never had a FB account so I don’t have the horror stories.
I would say that I’m sure FB is looking to clean that up. And there is really no doubt that social media is THE thing. Again, this is coming from a person who doesn’t like using social media. But I cannot ignore the trend.

I’m interested in Matt’s forthcoming post.

Take care,
A.J.

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