Bullish Case for Facebook

As the unofficial board’s resident Facebook bull, asking a question about Facebook is akin to Batman seeing his light shine above Gotham. I will be sure to show up :slight_smile:

I should also note that, like Saul, I suspended my account years ago. Not for the same reasons, but I just found it was sucking away too much of my time. Even now, on the rare occasions I surf my wife’s feed, I could easily lose a half hour or more just by checking it “real quick”. So, as promised, here is my bullish case for Facebook.

First, I do not think Facebook is a one-trick pony whose only way to a higher market cap is through advertising revenue. Of course, let’s just acknowledge Facebook’s incredible advertising prowess. This was written by Josh Brown last April, but it still holds true today:

The Super Bowl is the most widely watched event in the world, and it’s because roughly 100 million people watch it. Facebook wouldn’t get out of bed for that kind of nightly audience. And think of the dollar amounts that the Super Bowl commands for thirty-second ads. Facebook’s usage is more than 10X the Super Bowl and it’s 24 / 7 / 365.

And here’s the best part – no one expects to be paid anything to create content for the platform. We’re the football players. We’re the announcers. We’re the cheerleaders. We do it for free, out of the sheer joy we experience from the exposition of ourselves. And we never get bored of it.

Value that.

From http://thereformedbroker.com/2016/04/28/the-new-religion/

And think about this: Facebook has over 4 million advertisers on its site. 4 million! And while, yes, Facebook’s ad load is near maximum capacity, Instagram and Video are just getting started! Facebook is still in the beginning phases of experimenting with ads on videos. This news is from a couple of weeks ago:

Industry sources say the social network is going to start testing a new “mid-roll” ad format, which will give video publishers the chance to insert ads into their clips after people have watched them for at least 20 seconds.

For now, Facebook will sell the ads and share the revenue with publishers, giving them 55 percent of all sales. That’s the same split offered by YouTube, which dominates the online video ad business.

If the new ads take off, they could represent the first chance many video publishers have had to make real money from the stuff they’ve been running on Facebook.

From http://www.recode.net/2017/1/9/14211466/facebook-video-adver…

Facebook’s video ads are still in the early innings.

As for Instagram, ad revenue is projected to jump by about 50% this year:

It was just September 2015 when Instagram opened up advertising opportunities. However, the company is on track to bring in more than $1.85 billion in ad revenue this year, and that revenue is predicted to rise to $2.73 billion in 2017. Similarly, a poll of U.S. marketers conducted by Advertising Age and RBC Capital Markets found that 30 percent of respondents were currently leveraging Instagram advertising and an additional 31 percent plan to do so in 2017.

Working in Instagram’s favor is its ownership by Facebook, making it easy for advertisers to simply extend their existing Facebook advertising buys across the photo-sharing platform. Instagram hasn’t broken through, yet, as a leader in video content or video advertising, but considering Facebook’s emphasis on it, you have to assume a pivot in focus is coming. Brands also are investing heavily in influencer marketing on Instagram, upwards of $500 million a year, by directly paying influencers to promote their products there.

From https://www.memphisdailynews.com/news/2017/jan/4/marketers-w…

And Instagram already has 500K advertisers on its site. Instagram ads are also still in early innings.

And I know I already linked my article, but I do believe Facebook has a real potential in e-commerce through its two messaging apps, Messenger and WhatsApp. From the article:

During Facebook’s 2015 fourth-quarter conference call, CEO Mark Zuckerberg was asked point-blank by a Bernstein analyst what his thoughts were about the role of the different Facebook platforms in payments. Zuckerberg replied, “We don’t view ourselves as a payments business, that’s not the type of company that we are.” Instead, Zuckerberg said, Facebook wanted to partner with “everyone” in the payments industry to work at removing the friction from business transactions.

Of course, actions are more important than words, and investors should take notice that Facebook has followed up on its stated desire of creating partnerships with existing payments companies. In October 2016, Facebook and PayPal entered into an agreement that should prove to be mutually beneficial to both companies. The deal calls for PayPal to become a payment option across more of Facebook’s platforms, including commerce activity on Messenger. It’s also easier now for users to link their PayPal accounts to the site.

The deal does exactly what Zuckerberg said Facebook wanted: To make the process of buying and selling goods online smoother and easier.

Facebook’s sole focus seems to be growing its platforms’ universes and making them even more all-encompassing. Moving beyond the world of advertising and creating the ability to process transactions is just a natural step in that direction

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

Finally, there is Oculus. I do not know whether Oculus will ever have a material impact on the company’s earnings, but if virtual/augmented reality takes off, it could.

Oh, and the company’s numbers just look great:

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 last quarter’s other 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

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


Matt, you are awesome.

Value that.

That’s why I kick myself for not buying FB in the early days. In Oct 2012 (when they hit 1B users) you could have had the stock for $20/share. Ugh. The thing that I didn’t get about what makes those 1B users so much more value than Twitter’s 300M or whatever is just what you said: so much real estate. So much content! Their hardest problem is probably keeping up with the bandwidth (though I haven’t seen that be a problem any time recently).

For now, Facebook will sell the [video] ads and share the revenue with publishers, giving them 55 percent of all sales.

That could be huge…have you seen any estimates?

[Instagram] is on track to bring in more than $1.85 billion in ad revenue this year, and that revenue is predicted to rise to $2.73 billion in 2017.

Nice to see great growth there.

Facebook’s ad load is near maximum capacity

This is the crux, to me. Of course FB will keep growing. There’s video, which who knows how big that will be or how fast it will grow. There’s Instagram, Messenger, Whatsapp, VR, AR…lol. There’s a huge runway for lots of smaller pieces. But if the cash cow is nearly maxed out, overall growth might slow down and that might cause the market to reconsider giving FB a premium PE. But even as I say that I wonder, is 35 even that premium? Even if they can grow as fast as GOOG, they should be able to command a PE over 20 (probably 25) for years to come. And maxed out doesn’t mean retreating…it strikes me that they (like GOOG) will never have the massive PE contraction AAPL had, because their revenue is so much more stably recurring.

I’m trying to see the bear case, but FB is hard to argue with.




If you pressed me for a bear case this is what I would say: Facebook has not yet been a public company through a major recession. When recessions hit, advertising revenue can dry up pretty fast. While Facebook’s pool of advertising clients is as deep and wide as anybody’s, it could still shrink dramatically during a real recession. Is this a concern of mine? Not too much. During a recession, most companies are going to suffer. And these have historically proven to be good times to pick up shares at discounted prices. But I do sometimes wonder if a recession would hit Facebook harder than most.

Still, user engagement might even go up during a recession since use of the site is free. And they have lots of cash to weather any storm. And their valuation has improved dramatically over the last year or so, even as the share price has risen.

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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Great post, Matt,

I’m a FB bull and the ticker guide for Facebook.

I love FB as a social media site. I have friends all around the world and can easily stay in touch with them via FB.

As well, I have family in various states as well as in the country of Panama. I follow all of them as well.

FB also owns Instagram, which they recently just started adding ads to it.

They also own WhatsApp and Occulis Rift.

Matt has already posted their great numbers.

Oh, FB also has a Marketplace page. I just closed on a single family home 5 days ago. This is going to be a rental home. I listed it on FB marketplace and in 24 hours, I had 40 responses. In 36 hours, I was up to 60.

I just had a family sign the paperwork today to move in on the first.

2 1/2 years ago, I sold my Netflix stock and this paid for the complete renovation of my primary residence basement.

Now, Facebook helped me to rent my first rental home very quickly.

Fool on,


Long FB, no position in NFLX


Just a brief update to my bullish case for FB. Instagram has now surpassed 1M advertisers. That’s advertisers, not users. On its way to a billion users and now has a million advertisers. For Instagram, not Facebook’s primary platform just the small acquisition it made for a $1B a few years ago. I remember those who questioned that acquisition’s valuation and wondered if it was money well spent too! Anyway, a million advertisers is what you call diversified streams of revenue!

Facebook’s (NASDAQ:FB) Instagram may be young as a business, but it’s taking off in a big way. The company only opened up the platform to advertising back in September 2015, which was the first time that Facebook began monetizing the popular photo-sharing service. That came about three years after Facebook closed the acquisition in September 2012.

Instagram announced today that it has reached 1 million monthly active advertisers, less than 18 months after launching the ad platform. Well done, Mark Zuckerberg. Well done.

The service’s progress with growing its advertiser base is nothing short of astounding. Instagram provides updates on its advertiser base every few months: 200,000 in February 2016, 500,000 in September 2016, and 1 million today.

Read the entire article at https://www.fool.com/investing/2017/03/22/instagrams-adverti…

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


If you pressed me for a bear case this is what I would say: Facebook has not yet been a public company through a major recession. When recessions hit, advertising revenue can dry up pretty fast.

That’s a common wisdom, but it’s barely true. I was in broadcasting for the two Reagan recessions, the one at the end of the H.W.Bush years, and just out when the NASDAQ blew a gasket in 99 at the end of the Clinton years. I do not know what happened during the collapse of 2008, and I suspect it was much worse for advertising, as it was for everything, but I do not know. I will also say that some of these are almost 40 years ago, so the memory fades, but my recollection is that during those recessions our TV stations were off something like 5%, and the radio stations 2%. Could’a been a little more, depending. Now the company was looking to us for 5% growth, even 8-10% growth during the first Reagan set-back (remember inflation was an enormous part of that), so to them it looked like a 10-12% setback. But in real dollars, year over year it was minimal, which is not to say that we all enjoyed big bonuses the following January :wink: And we, like nearly all businesses, ran around cutting costs as best we could, but we did not stop doing the things we had to do to continue being successful. And our own advertising and promotion was one of those (although yes, they were trimmed).

What we found is that traditional newspaper advertisers stayed in newspapers (department stores, clothing stores, such as it was back then) but at reduced volumes. Television advertisers were different. The really big guys stuck it out, maybe trimmed a little. The medium size guys (car dealers) would reallocate, chop the TV budget in half but reapportion half of that into radio (which is why radio didn’t fall as far. As we were losing “little retail guys” they were [paradoxically] being replaced by shifting dollars from “big retail guys” coming downstream). The small TV guys just moved out of prime time and off-prime (afternoons and access) into garbage time (mornings, at the time, and late night [not Johnny Carson who held a premium].)

Now it’s a whole new world, and I make no pretense of knowing what will happen, but ad businesses, by and large, hold up decently during recessions. Businesses still have to advertise, they’re just better at squeezing the numbers and being “more efficient.” We never, and I mean never would lower rates, because it was so hard to get them up in the first place. We didn’t want to have to fight that “rate card increase” fight again when things improved. (That may be quite different under the Google-esque “bid your own rate” scenario, dunno.)

At any rate, recessions aren’t fun for anyone, but for a business with a gigantic margins that Facebook already has I wouldn’t be too worried. They could suffer a bit of margin compression for a year or two and come out just fine. I suspect businesses dealing in hard goods or luxury services (anyone think Facebook is a luxury?) would be hurt far worse.

PS: Got some at 17, after underbidding the IPO bounce and getting pissed that I missed it. I turned away from it only to see if had fallen sharply post-IPO. Felt very smart when I bought a stack. Then sold about half in the mid-30’s, now very stupid. I still have half, so I feel half smart, as usual.


Thanks for that great advertising perspective GoofyHoofy. Appreciate it.

What I love about Facebook is how much untapped growth potential the company has left. Came across this article the other day:

Some might think that people already spend too much time on the social network. According to one estimate, most Americans spend the equivalent of two full workdays each month on Facebook. In the future, might they pass even more time? Mark Zuckerberg is hoping so. Next week Facebook is expected to announce more plans for turning Messenger, one of its messaging services, into a portal through which people can fulfill tasks, like ordering taxis and communicating with businesses. Mr Zuckerberg is hoping that Facebook will be an even bigger part of the mobile ecosystem in the future. Being both useful and addictive could win Facebook even more friends.

From http://www.economist.com/blogs/graphicdetail/2016/04/daily-c…

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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