FB - Facebook

[Liberty]

Transcript now available for those curious:

 

https://s21.q4cdn.com/399680738/files/doc_financials/2018/Q2/Q218-earnings-call-transcript.pdf

[Spekulatius]

Looks like revenue growth in the 20% range and expense growth much faster than revenues until 2019 at least. FB takes a long term view here apperntly and this comes at a cost.

[BG2008]

Added some more at $165 and change. Looks like a few people need to change their underwear all of a sudden.

 

You got a better fill than me.  I picked up some at $166-167. 

[BG2008]

Has anyone been using groups on FB lately?  I joined the Instant Pot Group and Peloton Group.  It is engaging as heck.

[LongTermView]

Not sure what to make of some of the things David said:

Our total revenue growth rate decelerated approximately 7 percentage points in Q2 compared to Q1. Our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high single digit percentages from prior quarters sequentially in both Q3 and Q4.

[winjitsu]

Looks like revenue growth in the 20% range and expense growth much faster than revenues until 2019 at least. FB takes a long term view here apperntly and this comes at a cost.

 

My two take-aways are that they see op margins going from 45% -> 35% over the next several years, and costs will grow faster than revenues in the interim, so EPS will decrease.

[SlowAppreciation]

Looks like revenue growth in the 20% range and expense growth much faster than revenues until 2019 at least. FB takes a long term view here apperntly and this comes at a cost.

 

My two take-aways are that they see op margins going from 45% -> 35% over the next several years, and costs will grow faster than revenues in the interim, so EPS will decrease.

 

Decrease? Or just decelerate?

[Spekulatius]

Right think earnings/share growth will decelerate or go close to zero, but not going negative. if the operating margin declines from 44% to 35%, that’s is an ~20% decline in margins. In order to compensate for this with higher revenues, they will need to increase their revenues by 25%, which seems doable. This very much will depend on thr ramp for the expense spent and how revenues develop.

[nickenumbers]

Listening to everyone talk about rev growth, and the calculus around growth rates decelerating...  I love it!

 

It is like soft porn for a finance person..  It would be better if you whispered it with some 70s bass guitar..

 

_{"facebook margins growth is going to slow..."}

 

 

[Packer16]

Aren't you guys concerned about forced data portability & network connection by the EU and other governments regulating Facebook? This is getting traction in the EU & if it happens in the RoW and the US, Facebook will loose its monopoly and up to this point exclusive networking capability.  This could lead to lower CPMs & lower user growth which would be a reversal of historic patterns that have lead to FB's current valuation.  FB adds very little value add, the content is mostly the users & FB is monetizing someone else's content not their own.  If content is king, at some point FB will have to face the competitive piper with governments' encouraging competition faster than the market would on its own.

 

Packer

[rogermunibond]

https://www.americanactionforum.org/print/?url=https://www.americanactionforum.org/insight/data-portability-act-might-not-effective-policy-path/

 

It seems like social graph portability has lost favor among those in the US discussing ways to regulate FB, GOOG, etc.

 

 

[Jurgis]

https://www.americanactionforum.org/print/?url=https://www.americanactionforum.org/insight/data-portability-act-might-not-effective-policy-path/

 

It seems like social graph portability has lost favor among those in the US discussing ways to regulate FB, GOOG, etc.

 

Good paper. Hits quite a few important points that some people don't consider when they talk about data portability and/or FB/GOOGL regulation.

[Packer16]

I think the argument is pretty weak.  FB can charge premium prices because of the monopoly it has not because of the technology it has.  The EU is forcing data portability and if they stick to their guns (& I have no reason to doubt them) then the landscape changes.  I think the assumption some folks are under is that FB will continue to grow despite a robust portability scheme which I skeptical of.  If Europe can develop an enforceable data portability standard why wouldn't the US also insist on this.  Saying this will stifle investment is hogwash as the return on investment for FB is higher than any other competitive market based return & also leads into its current valuation.

 

Packer

[merkhet]

I think the idea of data portability leading to FB weakness is worth discussing, but is the focus correctly on "now people can take their data, friend map, whatever, and leave"? Where would they go? MySpace?

 

It is surprisingly hard to get the network effect going for another social network. This might reduce some frictions, but will it really make it easy enough for a threat to emerge? There is a concerted action problem that is rather difficult to solve.

[nickenumbers]

Today I am buying 2 year LEAPs on 210 Facebook Call options.  FB- 177 today, and 217 yesterday.

 

Thesis-  Market is down 18-20%, and the option values are down significantly more.  In 6-12 months the stock will be up to 200, and maybe 210.  FB is a powerhouse with a wide moat and able managers.  And I am giving myself a 24 month runway. 

 

In the word of Mohnish Pabrahi I think it is a "heads I win, tails I don't lose much."

 

 

Mr. Market is in a panic today..  I will buy from him.

[Liberty]

I think the idea of data portability leading to FB weakness is worth discussing, but is the focus correctly on "now people can take their data, friend map, whatever, and leave"? Where would they go? MySpace?

 

It is surprisingly hard to get the network effect going for another social network. This might reduce some frictions, but will it really make it easy enough for a threat to emerge? There is a concerted action problem that is rather difficult to solve.

 

Ben Thompson argued that data portability will tend to favor the biggest aggregators. They'll suck in data from any interesting new entrant, making them strongers, while new entrants will still have high barriers to entry (now including things like GDPR and other bureaucratic burdens), and getting a network effect started is still very hard (proof: apps have been able to use phone contacts to boostrap social networks for a long time, yet we're not seeing many flourish).

[Jurgis]

I'm just gonna grab popcorn and watch how any company will try to compete with FB data portability or not.

 

What may happen is data slurping by big cos like LinkedIn/FB?/Google?/etc. already do with your email contacts. "Give us your FB social graph, we gonna spam people you may know to get connected to you on NotReallyNewSocialNetwork". Oh wait, doesn't the privacy laws preclude that? Doesn't person Y have anything to say when you "port" the fact that you are connected to them?

 

And BTW, this has been attempted multiple times via email harvesting. I've been invited to a bunch of NewSocialNetworks by relative/friend spam when they "port" their email data to some crappy/spam social net wannabe. Good luck.  ::)

 

Not that FB should rest on laurels. Like the paper said rightly, social network dies because it falls behind, is not used, UI sucks, etc. It's definitely not a "do nothing and collect checks" business. But then almost nothing is.

 

Edit: what Liberty and merkhet said too.

[Packer16]

I have no problem with large networks but what is needed in competition.  Most likely it would be the larger networks anyway, Google & SNAP.  You can measure competition by CPM rates.  If CPM rates are falling then you have a competitive market.  If they are rising you do not.  I would be interesting to see FB's growth rate in a declining CPM environment & what valuation that would support.

 

In terms of multiple players, other internet spaces like travel & hotels appear to have multiple competing players.  IMO the issue with social networking companies is the incentives are wrong.  The incentive should be to create useful features for users not ways to monetize the user base.  Since these businesses are capital light they do not need monetize their bases to the max.  If the business is more capital intensive, I can understand the rationale more.  IMO this is why Google Finance has turned into a wasteland.  When you focus is monetization the results can be pretty bad because the monetary incentive clashes with what the right thing to do is.  That is manifest in all the privacy issues we hear about.   

 

Packer 

[Liberty]

I have no problem with large networks but what is needed in competition.  Most likely it would be the larger networks anyway, Google & SNAP.  You can measure competition by CPM rates.  If CPM rates are falling then you have a competitive market.  If they are rising you do not.  I would be interesting to see FB's growth rate in a declining CPM environment & what valuation that would support.

 

Packer

 

Google already tried to compete with FB. It was called Google+.

[Guest Schwab711]

Competition is every website online that lets you advertise, right? FB is just one option of many options to advertise on. FB just happens to have a relative advantage to other websites in user engagement. In general, folks are spending more time online relative to legacy uses of leisure time. User engagement with ads on FB tends to be much higher relative to most other places people spend time on when online. Thus, CPM's are generally climbing and GOOG/FB CPM's are climbing faster.

[rogermunibond]

COFB and these boards are a competitor to FB.  They engage eyeballs for a niche audience of people with shared interests.  And Parsad is generous is using a membership model as opposed to harvesting our data or feeding us ads.

 

The competition for FB is that niche networks or groups evolve into true wide social networks.  Reddit, 4Chan, discord, Twitch etc.

[bathtime]

Today I am buying 2 year LEAPs on 210 Facebook Call options.  FB- 177 today, and 217 yesterday.

 

Thesis-  Market is down 18-20%, and the option values are down significantly more.  In 6-12 months the stock will be up to 200, and maybe 210.  FB is a powerhouse with a wide moat and able managers.  And I am giving myself a 24 month runway. 

 

In the word of Mohnish Pabrahi I think it is a "heads I win, tails I don't lose much."

 

 

Mr. Market is in a panic today..  I will buy from him.

 

Asking out of ignorance, would the LEAPS have a volatility premium today in higher implied volatility because of the big drop?

[Packer16]

I agree that CoBF is a competitor in its niche & engagement is high here.  I am glad Sanjeev has not tried to monitize this to the max as this would annoy me & it is not needed to run the site.  It is not needed for FB either it is just that the expectations set by investors are creating incentives that are in opposition to its users.  This conflict can be overcome over short periods of time by folks doing the right thing but eventually the incentives overcome the good behavior & you get Google Finance, a marketing website that has some content/tools versus a content/tool website that has some marketing.

 

Packer

[Guest Schwab711]

I agree that there will always be a concern of over-supplying ads in an attempt to goose short-term earnings. FB just started monetizing the platform in earnest in the past 3-4 years though. I remember when FB IPO'd and I thought it had peaked in popularity. Now here we are at 1.4B+ DAUs. The numbers say FB is roughly as popular as SNAP (from the POV of time spent on the platform/day) while being a magnitude larger and having an older user base (I suppose just about any network of scale has an older user base relative to SNAP). FB is an incredible platform/network/whatever term gets the highest multiple now.

 

I think Google Finance (and Yahoo Finance, Morningstar, ect before them) is a more specific issue. When the SMF excel add-in that was still popular, it seemed like every site that was suggested to pull data from ultimately changed their UI to make the task much more difficult or impossible as folks adopted. Eventually, Google Finance also changed. I think these sites had an issue of too many people pulling data that was priced on a per-use basis without visiting the site and generating off-setting advertisement dollars. The example is still relevant to keep in my because it may be applicable to FB at some point but I think it is a unique issue relative to FB at present.

 

I really don't like to use FB but I am very impressed by the anecdotal ROI claims of marketing campaigns for various types of and sizes of businesses on their core site that I've collected. It's interesting that many users on core FB actually like to see ads and that % of users increases with respect to Instagram. Another example of FB's effectiveness at segmenting and defining their users' interests is the 2016 campaign. Roughly $1b was spent on FB across local, state, and federal campaigns in 2016. In 2012, a de minimis amount was spent. In 2016, Trump's campaign showed the raw potential of FB data analysis + a well-prepared advertising campaign. I expect the 2018 elections will result in roughly similar or higher spending relative to 2016 and that 2020 elections will blow 2016 out of the water. I'm not sure if FB or GOOGL is better at categorizing their users but they are both much better than any other advertising platform out there.

 

Edit: I never expected to be a FB bull but I think 20x ex-cash earnings that assume drastically decelerating growth and 1,000 bp decline in EBIT margins is a pretty darn good deal right now, considering what else is available. FB could be overly pessimistic on operating expenses, monetization of stories or IG/WhatsApp. Monetization of Asia/RoW users could continue for a long period of time. I think there's relatively high visibility to earnings over the next few years and a strong company, though more mature, from that point. FB today feels like WMT in 2015 when McMillon said earnings would decline for 2 years as they increased investment and re-positioned the company. It's not a homerun investment but it feels like there's outperformance from here in the intermediate term.

[Gregmal]

I think the bounce 165-180 was a dead cat driven largely by this glamour stock's reputation as such. Short term, the outlook is hideous, and at the least will be a cloud over the company. This also has regulatory issues, and has been/become a political whipping boy. Enough to keep me away, I think we're back under 170 in not too distant future. Just my 2c though.