Facebook (FB) Down 9.4% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Facebook (FB). Shares have lost about 9.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Facebook due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Facebook Q4 Results Benefit From Solid User Growth

Facebook reported fourth-quarter 2019 earnings of $2.56 per share that beat the Zacks Consensus Estimate by 1.6% and increased 7.3% year over year.

Revenues of $21.08 billion comfortably surpassed the Zacks Consensus Estimate by 0.9% and rose 24.6% year over year. At constant currency (cc), revenues rallied 26%.

Monthly active users (MAUs) were 2.498 billion, up 7.7% year over year. Daily Active Users (DAUs) were 1.657 billion, on average, increasing 8.8% year over year and representing 66% of MAUs.

Family Daily Active People (DAP), defined as a registered and logged-in user who visited at least one of the Family products (Facebook, Instagram, Messenger, and/or WhatsApp) on a given day, was 2.26 billion compared with 2.03 billion in the year-ago quarter.

Family Monthly Active People (MAP) was 2.89 billion compared with 2.64 billion in the year-ago quarter.
 
User Base Expands in Q4

Asia-Pacific DAUs increased 11.1% year over year to 641 million, driven by growth in India, Indonesia and the Philippines.

DAUs in the Rest of the World (RoW), Europe and the United States & Canada grew 11.3%, 4.3% and 2.2% to 532 million, 294 million and 190 million, respectively.

MAUs in Asia-Pacific, RoW, Europe and the United States & Canada grew 9.6%, 8.9%, 3.4% and 2.5% to 1.04 billion, 817 million, 394 million and 248 million, respectively.

Additionally, Facebook estimates that more than 140 million businesses, mostly small businesses, are using its services on a monthly basis.

Revenue Details

Geographically, the Asia-Pacific was the strongest region, with revenue year-over-year growth of 32.8%, followed by RoW’s 27.9%, Europe’s 24.3% and the United States & Canada’s 21.5%.

Advertising revenues rose 32.8% year over year (32% at cc) to $20.74 billion. Asia-Pacific and RoW were the strongest regions, increasing 32.8% and 27.9%, respectively. Advertising revenues in the United States & Canada and Europe grew 21.5% and 24.1%, respectively.

Ad impressions served rose 31%, driven by ads on Instagram Stories and Feed, and Facebook News Feed.

Facebook witnessed strong non-video feed engagement in the United States and Canada on the core Facebook app. In other regions, management saw good strength in video.

Additionally, management stated that more than 50% of accounts on Instagram are using Explore every month. Notably, beginning the third quarter, ads were available to 100% of advertisers.

However, average price per ad decreased 5% from the year-ago quarter due to an unfavorable mix shift toward Stories ads and geographies, where the monetization rate is low.

Average Revenue per User (ARPU) growth was strongest in the Asia-Pacific, increasing 20.6% year over year, followed by Europe’s 20.3%. ARPU in the United States & Canada and RoW grew 18.8% and 17.5%, respectively. Worldwide ARPU rose15.6% to $8.52.

Payments and other fees improved 26.3% year over year to $346 million. The growth was primarily driven by higher sales of Oculus Quest.

Operating Details

In the reported quarter, costs and expenses soared 35.3% year over year to $12.22 billion.

Marketing & sales expenses grew 22.7% from the year-ago quarter to $3.03 billion. General & administrative expenses surged 87.4% year over year to $1.83 billion. Also, research & development expenses rose 38.7% to $3.88 billion.

The significant growth in general & administrative expenses was primarily due to the charges related to a $550-million settlement Facebook reached this month in connection with the Illinois Biometric Information Privacy Act litigation.

Notably, Facebook’s employee base was 45K at the end of the fourth quarter. The company currently has more than 1,000 engineers working on privacy-related projects.

Operating income of $8.86 billion grew 13.3% year over year. Operating margin contracted 420 basis points (bps) on a year-over-year basis to 42%.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash & cash equivalents and marketable securities were $54.86 billion compared with $52.27 billion as of Sep 30, 2019.

Capital expenditures were $4.24 billion, driven by ongoing investments in data centers, servers, network infrastructure and office facilities.

In 2019, the company opened data centers in Nebraska, New Mexico and Denmark supported by 100% renewable energy.

Free cash flow was $4.84 billion compared with $5.63 billion in the previous quarter.

Facebook bought back shares worth almost $1.3 billion in the reported quarter. The company also announced a $10-billion increase in its stock repurchase authorization program.

Guidance

Facebook expects the first-quarter revenue growth rate to decline a low-to-mid-single-digit percentage on a sequential basis due to ad targeting related headwinds, a maturing business and increasing impact from global privacy regulations.

The company stated that it is facing difficulties to utilize signals from user activity on third-party websites and services due to regulatory initiatives like GDPR and CCPA.

Additionally, changes made by Apple and Alphabet’s Google in their products (mobile operating systems and browser platforms) are limiting Facebook’s ability to track the user activity trend.

Further, the company’s own initiatives like the Off Facebook Activity controls have become a headwind.

Moreover, 2020 total expenses are expected between $54 billion and $59 billion. The company plans to continue spending over infrastructure, research & development and AR/VR initiatives.

Capital expenditures are expected to be $17-$19 billion due to investments in data centers, servers, office facilities and network infrastructure.

Facebook remains on track to achieve its 2020 goal of supporting global operations with 100% renewable energy and lowering operational carbon emissions by 75% from 2017 levels.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, Facebook has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions has been net zero. Notably, Facebook has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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