merlion88
2021-10-27
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Facebook Q3: Business As Usual For This Cash Printing Machine
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{"i18n":{"language":"zh_CN"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":855958126,"tweetId":"855958126","gmtCreate":1635328017718,"gmtModify":1635328017718,"author":{"id":3579910262296434,"idStr":"3579910262296434","authorId":3579910262296434,"authorIdStr":"3579910262296434","name":"merlion88","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"userType":1,"introduction":"","boolIsFan":false,"boolIsHead":false,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":8,"starInvestorFlag":false},"themes":[],"images":[],"coverImages":[],"extraTitle":"","html":"<html><head></head><body><p>Like</p></body></html>","htmlText":"<html><head></head><body><p>Like</p></body></html>","text":"Like","highlighted":1,"essential":1,"paper":1,"likeSize":5,"commentSize":3,"repostSize":0,"favoriteSize":0,"link":"https://laohu8.com/post/855958126","repostId":1122016779,"repostType":4,"repost":{"id":"1122016779","pubTimestamp":1635326808,"share":"https://www.laohu8.com/m/news/1122016779?lang=&edition=full","pubTime":"2021-10-27 17:26","market":"us","language":"en","title":"Facebook Q3: Business As Usual For This Cash Printing Machine","url":"https://stock-news.laohu8.com/highlight/detail?id=1122016779","media":"seekingalpha","summary":"Summary\n\nDespite massive headwinds surrounding Apple iOS 14.5 platform changes, Facebook delivered a","content":"<p>Summary</p>\n<ul>\n <li>Despite massive headwinds surrounding Apple iOS 14.5 platform changes, Facebook delivered a solid Q3 print with revenues growing at more than 30% with margins holding firm.</li>\n <li>With Q4 revenue guidance of $31.5B to $34B, Facebook expects to feel the negative impact of Apple's changes in the near term; however, I think these issues are solvable.</li>\n <li>The company is making massive AI/ML investments in 2022 by increasing CAPEX to $29-34B from ($19B in 2021) to overcome headwinds, i.e., the cash printer has no plans for a slowdown.</li>\n <li>Facebook's capital return (share repurchase) program was just boosted by $50B, and this provides a floor for the stock.</li>\n <li>The stock remains massively undervalued, and I rate it a strong buy for long-term investors.</li>\n <li>I do much more than just articles at Beating the Market: Members get access to model portfolios, regular updates, a chat room, and more.</li>\n</ul>\n<p>Introduction</p>\n<p>Facebook (FB) is a controversial company that is currently facing intense scrutiny from politicians, regulators, media, analysts, financial bloggers, and investors alike; however, as I said in my previous article (Facebook: Controversial, Yet Inevitable) on the company, Apple's (AAPL) iOS 14.5 platform changes were the biggest risk to the investment narrative. InQ3, the impact of Apple's policy changes on the digital advertising industry has come to light, and Facebook was not immune to these adverse effects.</p>\n<p>Due to Apple's policy changes, Facebook faced revenue headwinds during Q3, which led the company to miss revenue estimates by nearly half a billion dollars. Although this revenue miss may seem excessive, Facebook's quarterly revenues reached $29B (up 35% y/y) in Q3, while its gross margins remained steady at ~80% (<i>FYI, operating margins dipped to 36%</i>). The stock is trading at depressed valuations, and with an additional $50B of capital being allocated for share repurchases, it is hard to see much downside for Facebook at this moment in time. Interestingly, Facebook's management shared their belief that the company will be able to recover its \"Ad targeting and measurement capabilities\" over a multi-year time span through AI/ML technology, and they outlined plans to make massive investments in this area during 2022 and beyond.</p>\n<blockquote>\n On targeting, we're focused on improving campaign performance even with the increased limitations facing our industry. We're building commerce tools to help businesses reach more new customers and get more incremental sales. And over the longer term, we're developing Privacy Enhancing Technologies in collaboration with others across the industry to help minimize the amount of personal information we process, while still allowing us to show relevant ads. Progress in these areas will take time and will be a focus for us throughout 2022 and beyond.\n</blockquote>\n<blockquote>\n Source: Sheryl Sandberg, Facebook's COO\n</blockquote>\n<p>The Whistleblower drama around Facebook remains hot news, and Facebook has generally brushed off such events as non-events in the past. However, Mark Zuckerberg, Facebook's CEO, broke this pattern during the earnings call when he came out swinging with conspiracy theories in defense of Facebook. Here's what he had to say:</p>\n<blockquote>\n Before I get to our product update, I want to discuss the recent debate around our company. I believe large organizations should be scrutinized and I'd much rather live in a society where they are than one where they can't be. Good faith criticism helps us get better. But my view is that what we're seeing is a coordinated effort to selectively use leaked documents to paint a false picture of our company. The reality is that we have an open culture where we encourage discussion and research about our work so we can make progress on many complex issues that are not specific to just us. We have industry-leading programs to study the effects of our products and provide transparency into our progress because we care about getting this right.\n</blockquote>\n<blockquote>\n When we make decisions, we need to balance competing social equities, like free expression with reducing harmful content, or enabling strong encrypted privacy with supporting law enforcement, or enabling research and interoperability with locking down data as much as possible. It makes a good soundbite to say that we don't solve these impossible tradeoffs because we're just focused on making money, but the reality is these questions are not primarily about our business, but about balancing different difficult social values. And I've repeatedly called for regulation to provide clarity because I don't think companies should be making so many of these decisions ourselves.\n</blockquote>\n<blockquote>\n I'm proud of our record navigating the complex tradeoffs involved in operating services at global scale, and I'm proud of the research and transparency we bring to our work. Our programs are industry-leading. We have made massive investments in safety and security with more than 40,000 people and we are on track to spend more than $5 billion on safety and security in 2021. I believe that's more than any other tech company, even adjusted for scale. We set the standard for transparency with our quarterly enforcement reports and tools like our political ads archive. We established a new model for independent academic researchers to safely access data. We pioneered the Oversight Board as a model of self-regulation. And as a result, we believe that our systems are the most effective at reducing harmful content across the industry. And I think that any honest account of how we've handled these issues should include that.\n</blockquote>\n<blockquote>\n I also think that any honest account should be clear that these issues aren't primarily about social media. That means that no matter what Facebook does, we're never going to solve them on our own. For example, polarization started rising in the US before I was born. At the same time, independent research shows that many countries around the world have flat or declining polarization, despite similar social media use there to in the US. We see this pattern repeat with other issues as well. The reality is, if social media is not the main driver of these issues, then it probably can't fix them by itself either. We should want every other company in our industry to make the investments and achieve the results that we have. I worry about the incentives that we're creating for other companies to be as introspective as we have been. But I am committed to continuing this work, because I believe it will be better for our community and our business over the long term. We can't change the underlying media dynamics, but there's a different constituency that we serve that has always been more important and that I try to keep us focused on: and that's people.\n</blockquote>\n<blockquote>\n Billions of people use our services because we build the best tools to stay connected to the people you care about, to find communities that matter to you, and to grow your small business. And the reason we've been able to succeed for almost two decades is because we keep evolving and building. Facebook started in a dorm room and grew into a global website. We invented the News Feed and a new kind of ads platform. We became a mobile-first experience. And then we grew a whole family of apps that serve billions of people. And there is so much more to build. Even with all the tools we have today, we still can't feel like we're right there together with the people we care about when we're physically apart. We can't teleport as holograms to instantly be at the office without a commute, or at a concert with a friend, or in your 3 parents' living room to catch up. The creative economy and commerce tools are still nascent and there should be opportunity for millions of more people to make a living doing the work that they love. Our three product priorities remain our focus on creators, commerce, and building the next computing platform.\n</blockquote>\n<blockquote>\n Source:Facebook Q3 2021 Prepared Remarks\n</blockquote>\n<p>Now, I don't know if Facebook is doing enough to deal with the issues it is being accused of by the whistleblower; however, as an investor, I like a company that delivers consistently. Despite all the noise around the company, Facebook's business continues to go from strength to strength. In this article, we will review some highlights from Facebook's Q3 report, Q4 guidance and re-evaluate Facebook's worth in the aftermath of yesterday's earnings announcement. Let's get started!</p>\n<p>Solid Quarter, Weak Guidance</p>\n<p>In Q3, Facebook's revenue increased to $29B (up by ~35% y/y), representing acceleration in 2-year CAGR growth rates. Despite all the hatred for Facebook, the social media giant saw a +6% y/y increase in DAUs and MAUs this quarter. For the first time in over a year, Facebook's U.S. and Canada DAUs increased on a y/y basis. As they say, \"Any publicity is good publicity\". I think this statement is debatable, but Facebook's user growth is just incredible, considering its size and scale. We have talked about Apple's policy changes a lot recently, and Facebook is feeling the impacts of these changes, as evidenced by the near-zero q/q revenue growth. However, Facebook's ARPU remains strong across the board, with little pressure on margins.</p>\n<p><img src=\"https://static.tigerbbs.com/4e1b8a9be1866033115020fb364d5d50\" tg-width=\"640\" tg-height=\"381\" referrerpolicy=\"no-referrer\"></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/e32fb5f74f12fd54519fb50b6467e54f\" tg-width=\"640\" tg-height=\"379\" width=\"100%\" height=\"auto\"><span>Source:Facebook's Q3 2021 Earnings Presentation</span></p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/59281b588a352955ed5d5dc2264385ea\" tg-width=\"1849\" tg-height=\"340\" width=\"100%\" height=\"auto\"><span>Source:Facebook Q3 Earnings Release</span></p>\n<p>Even if it weren't spectacular, Facebook's Q3 report was certainly solid considering the market environment. With the earnings announcement, Facebook shared a piece of good news - a $50B boost to Facebook's capital return (share repurchase) program. Having ~$57B of cash waiting on the sidelines to buy Facebook gives the stock a virtual floor.</p>\n<p>What's In Store For Facebook?</p>\n<p>The future is inherently unpredictable; however, Facebook has a bright future ahead of itself. Here's what Facebook's CFO had to say about the company's earnings report:</p>\n<blockquote>\n Starting with our results for the fourth quarter of 2021, we plan to break out Facebook Reality Labs, or FRL, as a separate reporting segment. As we have discussed, we are dedicating significant resources toward our augmented and virtual reality products and services, which are an important part of our work to develop the next generation of online social experiences. The new segment disclosures will provide additional information on the performance of FRL and the investments we are making.\n</blockquote>\n<blockquote>\n Under this reporting structure, we will provide revenue and operating profit for two segments: The first segment, Family of Apps, will include Facebook, Instagram, Messenger, WhatsApp and other services. The second segment, Facebook Reality Labs, will include augmented and virtual reality related hardware, software and content. We expect our investment in Facebook Reality Labs to reduce our overall operating profit in 2021 by approximately $10 billion. We are committed to bringing this long-term vision to life and we expect to increase our investments for the next several years.\n</blockquote>\n<blockquote>\n Ahead of the fourth quarter earnings call, we will share additional details about the reporting format of our segmented financials. We expect fourth quarter 2021 total revenue to be in a range of $31.5 billion to $34 billion. Our outlook reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple's iOS 14 changes, and macroeconomic and COVID-related factors. In addition, we expect non-ads revenue to be down year-over-year in the fourth quarter as we lap the strong launch of Quest 2 during last year's holiday shopping season.\n</blockquote>\n<blockquote>\n As previously noted, we also continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations.\n</blockquote>\n<blockquote>\n <i>We expect 2021 total expenses to be in the range of $70-71 billion, updated from our prior outlook of $70-73 billion. We anticipate our full-year 2022 total expenses will be in the range of $91-97 billion, driven by investments in technical and product talent and infrastructure-related costs.</i>\n</blockquote>\n<blockquote>\n <i>We expect 2021 capital expenditures to be approximately $19 billion, updated from our prior estimate of $19-21 billion. For 2022, we expect capital expenditures to be in the range of $29-34 billion, driven by our investments in data centers, servers, network infrastructure, and office facilities.</i>\n</blockquote>\n<blockquote>\n We expect our fourth quarter 2021 tax rate to be in the high-teens. Absent any changes to U.S. tax law, we would expect our full-year tax rate in 2022 to be similar to the full-year 2021 rate. Please note that our outlook for 2022 expenses, capital expenditures and tax rate are preliminary estimates as we have not finalized our 2022 budget.\n</blockquote>\n<blockquote>\n Source: Facebook Q3 Earnings Release\n</blockquote>\n<p>For Q4, Facebook's revenue guidance is lukewarm at best; however, Mark and Co. could be sandbagging guidance, as usual, setting up for an easy beat-and-raise come next quarter. Now, I can't predict the exact impact of Apple's policy change on Facebook's revenues or profitability (nor can Facebook), but I do think that the following section will be enough to convince you to go long on Facebook.</p>\n<p>Facebook's Is A Cash Printing Machine That Will Keep Getting Bigger In The 2020s</p>\n<p>In Q3, Facebook raked in a record free cash flow of $9.547B on the back of strong revenue growth and lower-than-expected costs. According to Facebook's management team, the company will increase its CAPEX from $19B in 2021 to $29-$34B next year. Some critics are crying out for a drop-off in free cash flows; however, I think revenue growth combined with a steady gross margin profile will enable Facebook to deliver even greater free cash flows in 2022.</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/face43ea7f76072819760ef4692466c8\" tg-width=\"640\" tg-height=\"229\" referrerpolicy=\"no-referrer\"><span>Source: Facebook's Q3 2021 Earnings Presentation</span></p>\n<p>As we discussed in early October (source), Facebook's growth story is far from over. Digital advertising remains one of the most powerful secular growth trends, and Facebook commands a monopolistic market share in this massive market (with assets such as Instagram and WhatsApp still under-monetized). Also, as you may know, the social media giant is going all-in on metaverse (investing billions of dollars every year), attempting to build the infrastructure for the next greatest technological revolution.</p>\n<p>According to consensus analyst estimates from Seeking Alpha, Facebook's annual revenues could grow from ~$120B in 2021 to ~$340B in 2030 (~3x in 9 years). Considering Facebook's business fundamentals, I think it can achieve these numbers with relative ease (barring any major regulatory issues like breakoff of Instagram).</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/f14289d698283dbfdabf4c952b126029\" tg-width=\"640\" tg-height=\"632\" referrerpolicy=\"no-referrer\"><span>Source:Facebook Earnings Estimates - SA</span></p>\n<p>With all this information in mind, let's determine Facebook's fair value. To do so, we will employ our proprietary valuation model. Here's what it entails:</p>\n<ul>\n <li>In step 1, we use a traditional DCF model with free cash flow discounted by our (shareholders) cost of capital.</li>\n <li>In step 2, the model accounts for the effects of the change in shares outstanding (buybacks/dilutions).</li>\n <li>In step 3, we normalize valuation for future growth prospects at the end of the ten years. Then, using today's share price and the projected share price at the end of ten years, we arrive at a CAGR. If this beats the market by enough of a margin, we invest. If not, we wait for a better entry point.</li>\n</ul>\n<p><b>Assumptions:</b></p>\n<table>\n <tbody>\n <tr>\n <td><p>Forward 12-month revenue [A]</p></td>\n <td><p>$130 billion</p></td>\n </tr>\n <tr>\n <td><p>Potential Free Cash Flow Margin [B]</p></td>\n <td><p>35%</p></td>\n </tr>\n <tr>\n <td><p>Average diluted shares outstanding [C]</p></td>\n <td><p>~2.859 billion</p></td>\n </tr>\n <tr>\n <td><p>Free cash flow per share [ D = (A * B) / C ]</p></td>\n <td><p>$15.91</p></td>\n </tr>\n <tr>\n <td><p>Free cash flow per share growth rate</p></td>\n <td><p>12.5%</p></td>\n </tr>\n <tr>\n <td><p>Terminal growth rate</p></td>\n <td><p>3%</p></td>\n </tr>\n <tr>\n <td><p>Years of elevated growth</p></td>\n <td><p>10</p></td>\n </tr>\n <tr>\n <td><p>Total years to stimulate</p></td>\n <td><p>100</p></td>\n </tr>\n <tr>\n <td><p>Discount Rate (Our \"Next Best Alternative\")</p></td>\n <td><p>9.8%</p></td>\n </tr>\n </tbody>\n</table>\n<p>Here are the results for fair value (step 1 and 2):</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/e0827dad31e2bb1a307a8cd19422b815\" tg-width=\"634\" tg-height=\"764\" referrerpolicy=\"no-referrer\"><span>Source: L.A. Stevens Valuation Model</span></p>\n<p>As you can see, Facebook's fair value is ~$590 per share. The stock is trading at ~$335, which means Facebook has to climb +76.1% to realize its fair value. By utilizing conservative growth and margin assumptions, we have ensured that we have ample margin of safety in this investment.</p>\n<p>To calculate the total expected return, we simply grow the above free cash flow per share at our conservative growth rate, then assign a conservative multiple, i.e., 35x, to it for year-10. Thereby, we create a conservative intrinsic value projection by which we determine when and where to deploy our capital.</p>\n<p>Here are the results for expected returns:</p>\n<p class=\"t-img-caption\"><img src=\"https://static.tigerbbs.com/7a0ef89d27f8e69cf8fabb577b4c3816\" tg-width=\"606\" tg-height=\"429\" referrerpolicy=\"no-referrer\"><span>Source: L.A. Stevens Valuation Model</span></p>\n<p>According to the above set of results, Facebook's stock has the potential to grow from ~$335 to ~$2,260 at a CAGR of ~21% in the next ten years. Since the expected return for Facebook is much greater than my investment hurdle rate of 15%, I rate Facebook a strong buy at $335.</p>\n<p>Risks for Facebook</p>\n<p>In my previous article, I highlighted the risks associated with Apple's policy changes as under:</p>\n<blockquote>\n After a stellar Q2, Facebook's upcoming third-quarter numbers could turn out to be disappointing as growth decelerates (mostly due to tough comps). If the impact from Apple's platform changes is higher than expected, the stock's drawdown could go deeper.\n</blockquote>\n<p>After reviewing Q3 numbers, I feel at ease with my Facebook investment because the social media behemoth is performing much better than expected. Facebook's management mentioned a multi-year recovery path to get back its Ad targeting and ROI measurement capabilities; however, Facebook is faring better than rivals like Snapchat (SNAP), and with Facebook's humongous resources, I think Facebook will end up expanding its market share even further on the back of Apple's platform changes.</p>\n<p><i>Other previously highlighted investment risks for Facebook:</i></p>\n<ul>\n <li>With Facebook now struggling to provide marketers with adequate advertising data and targeting capabilities for the foreseeable future, a possible breakup of Instagram would be damaging. The family of apps needs to stick together for Facebook to maintain its dominance in the digital advertising world.</li>\n <li>Failure to monetize WhatsApp could curtail Facebook's future growth trajectory.</li>\n <li>Facebook's whistleblower controversy has revealed damaging information about the company and its leadership, which is shown to prioritize profits over public safety. A big fine is probably the best outcome for Facebook; however, the company may face new regulations that could erode some of its business fundamentals.</li>\n <li>Facebook is facing looming antitrust regulations along with other big-tech companies. However, FTC's case being tossed out in the federal courts is a big win for Facebook. The social media giant operates in a triopoly with Google and Amazon in the digital advertising world, and these three companies have a combined market share of ~60%. Hence, government agencies will likely fail to prove Facebook as a monopolistic business.</li>\n <li>Facebook's AR/VR and financial services (Novi) business lines are moonshot investments at this point, and if these businesses fail to achieve mass adoption, Facebook's growth trajectory could be curtailed.</li>\n <li>Digital advertising is probably one of the strongest secular growth trends in the world; however, a slowdown in this industry's growth could lead to lower-than-expected growth rates for Facebook. If the company fails to meet our revenue and profitability projections, our stock price targets may not be met.</li>\n</ul>\n<p>Source: Author's note -Facebook: Controversial, Yet Inevitable</p>\n<p>Concluding Thoughts</p>\n<p>As noise continues to swerve around Facebook, the social media behemoth remains a cash printing machine. In Q3, Facebook generated $9.5B in free cash flow while growing sales at ~35% y/y (despite tough comps). Although Facebook faces headwinds from Apple's policy changes, business fundamentals are going from strength to strength. As of yesterday, Facebook added $50B to its share repurchase program, and this puts a virtual floor on the stock.</p>\n<p>According to my analysis, Facebook is deeply undervalued, and investors buying here at ~$335 are getting a great deal.</p>","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Facebook Q3: Business As Usual For This Cash Printing Machine</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; 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}\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nFacebook Q3: Business As Usual For This Cash Printing Machine\n</h2>\n\n<h4 class=\"meta\">\n\n\n2021-10-27 17:26 GMT+8 <a href=https://seekingalpha.com/article/4461970-facebook-q3-earnings-cash-printing-machine><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Summary\n\nDespite massive headwinds surrounding Apple iOS 14.5 platform changes, Facebook delivered a solid Q3 print with revenues growing at more than 30% with margins holding firm.\nWith Q4 revenue ...</p>\n\n<a href=\"https://seekingalpha.com/article/4461970-facebook-q3-earnings-cash-printing-machine\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{},"source_url":"https://seekingalpha.com/article/4461970-facebook-q3-earnings-cash-printing-machine","is_english":true,"share_image_url":"https://static.laohu8.com/e9f99090a1c2ed51c021029395664489","article_id":"1122016779","content_text":"Summary\n\nDespite massive headwinds surrounding Apple iOS 14.5 platform changes, Facebook delivered a solid Q3 print with revenues growing at more than 30% with margins holding firm.\nWith Q4 revenue guidance of $31.5B to $34B, Facebook expects to feel the negative impact of Apple's changes in the near term; however, I think these issues are solvable.\nThe company is making massive AI/ML investments in 2022 by increasing CAPEX to $29-34B from ($19B in 2021) to overcome headwinds, i.e., the cash printer has no plans for a slowdown.\nFacebook's capital return (share repurchase) program was just boosted by $50B, and this provides a floor for the stock.\nThe stock remains massively undervalued, and I rate it a strong buy for long-term investors.\nI do much more than just articles at Beating the Market: Members get access to model portfolios, regular updates, a chat room, and more.\n\nIntroduction\nFacebook (FB) is a controversial company that is currently facing intense scrutiny from politicians, regulators, media, analysts, financial bloggers, and investors alike; however, as I said in my previous article (Facebook: Controversial, Yet Inevitable) on the company, Apple's (AAPL) iOS 14.5 platform changes were the biggest risk to the investment narrative. InQ3, the impact of Apple's policy changes on the digital advertising industry has come to light, and Facebook was not immune to these adverse effects.\nDue to Apple's policy changes, Facebook faced revenue headwinds during Q3, which led the company to miss revenue estimates by nearly half a billion dollars. Although this revenue miss may seem excessive, Facebook's quarterly revenues reached $29B (up 35% y/y) in Q3, while its gross margins remained steady at ~80% (FYI, operating margins dipped to 36%). The stock is trading at depressed valuations, and with an additional $50B of capital being allocated for share repurchases, it is hard to see much downside for Facebook at this moment in time. Interestingly, Facebook's management shared their belief that the company will be able to recover its \"Ad targeting and measurement capabilities\" over a multi-year time span through AI/ML technology, and they outlined plans to make massive investments in this area during 2022 and beyond.\n\n On targeting, we're focused on improving campaign performance even with the increased limitations facing our industry. We're building commerce tools to help businesses reach more new customers and get more incremental sales. And over the longer term, we're developing Privacy Enhancing Technologies in collaboration with others across the industry to help minimize the amount of personal information we process, while still allowing us to show relevant ads. Progress in these areas will take time and will be a focus for us throughout 2022 and beyond.\n\n\n Source: Sheryl Sandberg, Facebook's COO\n\nThe Whistleblower drama around Facebook remains hot news, and Facebook has generally brushed off such events as non-events in the past. However, Mark Zuckerberg, Facebook's CEO, broke this pattern during the earnings call when he came out swinging with conspiracy theories in defense of Facebook. Here's what he had to say:\n\n Before I get to our product update, I want to discuss the recent debate around our company. I believe large organizations should be scrutinized and I'd much rather live in a society where they are than one where they can't be. Good faith criticism helps us get better. But my view is that what we're seeing is a coordinated effort to selectively use leaked documents to paint a false picture of our company. The reality is that we have an open culture where we encourage discussion and research about our work so we can make progress on many complex issues that are not specific to just us. We have industry-leading programs to study the effects of our products and provide transparency into our progress because we care about getting this right.\n\n\n When we make decisions, we need to balance competing social equities, like free expression with reducing harmful content, or enabling strong encrypted privacy with supporting law enforcement, or enabling research and interoperability with locking down data as much as possible. It makes a good soundbite to say that we don't solve these impossible tradeoffs because we're just focused on making money, but the reality is these questions are not primarily about our business, but about balancing different difficult social values. And I've repeatedly called for regulation to provide clarity because I don't think companies should be making so many of these decisions ourselves.\n\n\n I'm proud of our record navigating the complex tradeoffs involved in operating services at global scale, and I'm proud of the research and transparency we bring to our work. Our programs are industry-leading. We have made massive investments in safety and security with more than 40,000 people and we are on track to spend more than $5 billion on safety and security in 2021. I believe that's more than any other tech company, even adjusted for scale. We set the standard for transparency with our quarterly enforcement reports and tools like our political ads archive. We established a new model for independent academic researchers to safely access data. We pioneered the Oversight Board as a model of self-regulation. And as a result, we believe that our systems are the most effective at reducing harmful content across the industry. And I think that any honest account of how we've handled these issues should include that.\n\n\n I also think that any honest account should be clear that these issues aren't primarily about social media. That means that no matter what Facebook does, we're never going to solve them on our own. For example, polarization started rising in the US before I was born. At the same time, independent research shows that many countries around the world have flat or declining polarization, despite similar social media use there to in the US. We see this pattern repeat with other issues as well. The reality is, if social media is not the main driver of these issues, then it probably can't fix them by itself either. We should want every other company in our industry to make the investments and achieve the results that we have. I worry about the incentives that we're creating for other companies to be as introspective as we have been. But I am committed to continuing this work, because I believe it will be better for our community and our business over the long term. We can't change the underlying media dynamics, but there's a different constituency that we serve that has always been more important and that I try to keep us focused on: and that's people.\n\n\n Billions of people use our services because we build the best tools to stay connected to the people you care about, to find communities that matter to you, and to grow your small business. And the reason we've been able to succeed for almost two decades is because we keep evolving and building. Facebook started in a dorm room and grew into a global website. We invented the News Feed and a new kind of ads platform. We became a mobile-first experience. And then we grew a whole family of apps that serve billions of people. And there is so much more to build. Even with all the tools we have today, we still can't feel like we're right there together with the people we care about when we're physically apart. We can't teleport as holograms to instantly be at the office without a commute, or at a concert with a friend, or in your 3 parents' living room to catch up. The creative economy and commerce tools are still nascent and there should be opportunity for millions of more people to make a living doing the work that they love. Our three product priorities remain our focus on creators, commerce, and building the next computing platform.\n\n\n Source:Facebook Q3 2021 Prepared Remarks\n\nNow, I don't know if Facebook is doing enough to deal with the issues it is being accused of by the whistleblower; however, as an investor, I like a company that delivers consistently. Despite all the noise around the company, Facebook's business continues to go from strength to strength. In this article, we will review some highlights from Facebook's Q3 report, Q4 guidance and re-evaluate Facebook's worth in the aftermath of yesterday's earnings announcement. Let's get started!\nSolid Quarter, Weak Guidance\nIn Q3, Facebook's revenue increased to $29B (up by ~35% y/y), representing acceleration in 2-year CAGR growth rates. Despite all the hatred for Facebook, the social media giant saw a +6% y/y increase in DAUs and MAUs this quarter. For the first time in over a year, Facebook's U.S. and Canada DAUs increased on a y/y basis. As they say, \"Any publicity is good publicity\". I think this statement is debatable, but Facebook's user growth is just incredible, considering its size and scale. We have talked about Apple's policy changes a lot recently, and Facebook is feeling the impacts of these changes, as evidenced by the near-zero q/q revenue growth. However, Facebook's ARPU remains strong across the board, with little pressure on margins.\n\nSource:Facebook's Q3 2021 Earnings Presentation\nSource:Facebook Q3 Earnings Release\nEven if it weren't spectacular, Facebook's Q3 report was certainly solid considering the market environment. With the earnings announcement, Facebook shared a piece of good news - a $50B boost to Facebook's capital return (share repurchase) program. Having ~$57B of cash waiting on the sidelines to buy Facebook gives the stock a virtual floor.\nWhat's In Store For Facebook?\nThe future is inherently unpredictable; however, Facebook has a bright future ahead of itself. Here's what Facebook's CFO had to say about the company's earnings report:\n\n Starting with our results for the fourth quarter of 2021, we plan to break out Facebook Reality Labs, or FRL, as a separate reporting segment. As we have discussed, we are dedicating significant resources toward our augmented and virtual reality products and services, which are an important part of our work to develop the next generation of online social experiences. The new segment disclosures will provide additional information on the performance of FRL and the investments we are making.\n\n\n Under this reporting structure, we will provide revenue and operating profit for two segments: The first segment, Family of Apps, will include Facebook, Instagram, Messenger, WhatsApp and other services. The second segment, Facebook Reality Labs, will include augmented and virtual reality related hardware, software and content. We expect our investment in Facebook Reality Labs to reduce our overall operating profit in 2021 by approximately $10 billion. We are committed to bringing this long-term vision to life and we expect to increase our investments for the next several years.\n\n\n Ahead of the fourth quarter earnings call, we will share additional details about the reporting format of our segmented financials. We expect fourth quarter 2021 total revenue to be in a range of $31.5 billion to $34 billion. Our outlook reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple's iOS 14 changes, and macroeconomic and COVID-related factors. In addition, we expect non-ads revenue to be down year-over-year in the fourth quarter as we lap the strong launch of Quest 2 during last year's holiday shopping season.\n\n\n As previously noted, we also continue to monitor developments regarding the viability of transatlantic data transfers and their potential impact on our European operations.\n\n\nWe expect 2021 total expenses to be in the range of $70-71 billion, updated from our prior outlook of $70-73 billion. We anticipate our full-year 2022 total expenses will be in the range of $91-97 billion, driven by investments in technical and product talent and infrastructure-related costs.\n\n\nWe expect 2021 capital expenditures to be approximately $19 billion, updated from our prior estimate of $19-21 billion. For 2022, we expect capital expenditures to be in the range of $29-34 billion, driven by our investments in data centers, servers, network infrastructure, and office facilities.\n\n\n We expect our fourth quarter 2021 tax rate to be in the high-teens. Absent any changes to U.S. tax law, we would expect our full-year tax rate in 2022 to be similar to the full-year 2021 rate. Please note that our outlook for 2022 expenses, capital expenditures and tax rate are preliminary estimates as we have not finalized our 2022 budget.\n\n\n Source: Facebook Q3 Earnings Release\n\nFor Q4, Facebook's revenue guidance is lukewarm at best; however, Mark and Co. could be sandbagging guidance, as usual, setting up for an easy beat-and-raise come next quarter. Now, I can't predict the exact impact of Apple's policy change on Facebook's revenues or profitability (nor can Facebook), but I do think that the following section will be enough to convince you to go long on Facebook.\nFacebook's Is A Cash Printing Machine That Will Keep Getting Bigger In The 2020s\nIn Q3, Facebook raked in a record free cash flow of $9.547B on the back of strong revenue growth and lower-than-expected costs. According to Facebook's management team, the company will increase its CAPEX from $19B in 2021 to $29-$34B next year. Some critics are crying out for a drop-off in free cash flows; however, I think revenue growth combined with a steady gross margin profile will enable Facebook to deliver even greater free cash flows in 2022.\nSource: Facebook's Q3 2021 Earnings Presentation\nAs we discussed in early October (source), Facebook's growth story is far from over. Digital advertising remains one of the most powerful secular growth trends, and Facebook commands a monopolistic market share in this massive market (with assets such as Instagram and WhatsApp still under-monetized). Also, as you may know, the social media giant is going all-in on metaverse (investing billions of dollars every year), attempting to build the infrastructure for the next greatest technological revolution.\nAccording to consensus analyst estimates from Seeking Alpha, Facebook's annual revenues could grow from ~$120B in 2021 to ~$340B in 2030 (~3x in 9 years). Considering Facebook's business fundamentals, I think it can achieve these numbers with relative ease (barring any major regulatory issues like breakoff of Instagram).\nSource:Facebook Earnings Estimates - SA\nWith all this information in mind, let's determine Facebook's fair value. To do so, we will employ our proprietary valuation model. Here's what it entails:\n\nIn step 1, we use a traditional DCF model with free cash flow discounted by our (shareholders) cost of capital.\nIn step 2, the model accounts for the effects of the change in shares outstanding (buybacks/dilutions).\nIn step 3, we normalize valuation for future growth prospects at the end of the ten years. Then, using today's share price and the projected share price at the end of ten years, we arrive at a CAGR. If this beats the market by enough of a margin, we invest. If not, we wait for a better entry point.\n\nAssumptions:\n\n\n\nForward 12-month revenue [A]\n$130 billion\n\n\nPotential Free Cash Flow Margin [B]\n35%\n\n\nAverage diluted shares outstanding [C]\n~2.859 billion\n\n\nFree cash flow per share [ D = (A * B) / C ]\n$15.91\n\n\nFree cash flow per share growth rate\n12.5%\n\n\nTerminal growth rate\n3%\n\n\nYears of elevated growth\n10\n\n\nTotal years to stimulate\n100\n\n\nDiscount Rate (Our \"Next Best Alternative\")\n9.8%\n\n\n\nHere are the results for fair value (step 1 and 2):\nSource: L.A. Stevens Valuation Model\nAs you can see, Facebook's fair value is ~$590 per share. The stock is trading at ~$335, which means Facebook has to climb +76.1% to realize its fair value. By utilizing conservative growth and margin assumptions, we have ensured that we have ample margin of safety in this investment.\nTo calculate the total expected return, we simply grow the above free cash flow per share at our conservative growth rate, then assign a conservative multiple, i.e., 35x, to it for year-10. Thereby, we create a conservative intrinsic value projection by which we determine when and where to deploy our capital.\nHere are the results for expected returns:\nSource: L.A. Stevens Valuation Model\nAccording to the above set of results, Facebook's stock has the potential to grow from ~$335 to ~$2,260 at a CAGR of ~21% in the next ten years. Since the expected return for Facebook is much greater than my investment hurdle rate of 15%, I rate Facebook a strong buy at $335.\nRisks for Facebook\nIn my previous article, I highlighted the risks associated with Apple's policy changes as under:\n\n After a stellar Q2, Facebook's upcoming third-quarter numbers could turn out to be disappointing as growth decelerates (mostly due to tough comps). If the impact from Apple's platform changes is higher than expected, the stock's drawdown could go deeper.\n\nAfter reviewing Q3 numbers, I feel at ease with my Facebook investment because the social media behemoth is performing much better than expected. Facebook's management mentioned a multi-year recovery path to get back its Ad targeting and ROI measurement capabilities; however, Facebook is faring better than rivals like Snapchat (SNAP), and with Facebook's humongous resources, I think Facebook will end up expanding its market share even further on the back of Apple's platform changes.\nOther previously highlighted investment risks for Facebook:\n\nWith Facebook now struggling to provide marketers with adequate advertising data and targeting capabilities for the foreseeable future, a possible breakup of Instagram would be damaging. The family of apps needs to stick together for Facebook to maintain its dominance in the digital advertising world.\nFailure to monetize WhatsApp could curtail Facebook's future growth trajectory.\nFacebook's whistleblower controversy has revealed damaging information about the company and its leadership, which is shown to prioritize profits over public safety. A big fine is probably the best outcome for Facebook; however, the company may face new regulations that could erode some of its business fundamentals.\nFacebook is facing looming antitrust regulations along with other big-tech companies. However, FTC's case being tossed out in the federal courts is a big win for Facebook. The social media giant operates in a triopoly with Google and Amazon in the digital advertising world, and these three companies have a combined market share of ~60%. Hence, government agencies will likely fail to prove Facebook as a monopolistic business.\nFacebook's AR/VR and financial services (Novi) business lines are moonshot investments at this point, and if these businesses fail to achieve mass adoption, Facebook's growth trajectory could be curtailed.\nDigital advertising is probably one of the strongest secular growth trends in the world; however, a slowdown in this industry's growth could lead to lower-than-expected growth rates for Facebook. If the company fails to meet our revenue and profitability projections, our stock price targets may not be met.\n\nSource: Author's note -Facebook: Controversial, Yet Inevitable\nConcluding Thoughts\nAs noise continues to swerve around Facebook, the social media behemoth remains a cash printing machine. In Q3, Facebook generated $9.5B in free cash flow while growing sales at ~35% y/y (despite tough comps). Although Facebook faces headwinds from Apple's policy changes, business fundamentals are going from strength to strength. As of yesterday, Facebook added $50B to its share repurchase program, and this puts a virtual floor on the stock.\nAccording to my analysis, Facebook is deeply undervalued, and investors buying here at ~$335 are getting a great deal.","news_type":1},"isVote":1,"tweetType":1,"viewCount":514,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":[],"verified":2,"subType":0,"readableState":1,"langContent":"CN","currentLanguage":"CN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":false,"length":4,"xxTargetLangEnum":"ZH_CN"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/855958126"}
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