Weekly Equity Idea Highlight - 2020 06 22
Market expectations are for FB's current doldrums to continue in perpetuity. The marketis expecting UAFRS-based (Uniform) ROA (ROA') to fade from current low levels, with
growth also being cut by more than half.
However, management continues to have multiple levers to pull to drive strong growth
and ROA' expansion thanks to their strong brands. As such, market expectations, which
appear to be solely focused on regulatory and cost downside, appear too pessimistic,
spelling potential for equity upside.
FB management's compensation framework aligns them to focus on driving user growth
and top-line growth in an investment-efficient manner, limiting the risk they will chase
growth in a way that will compress ROA' going forward. This gives further confidence that
current market expectations for ROA' are too pessimistic.
Also, management has shown building confidence in the past few calls about their
outlook. In Q3, management showed confidence in driving user engagement, DAU rates,
the strength of their mobile ad platform, and the potential for their investments. All these
point to management gaining more control of the business and successfully improving
profitability.
In Q4, they continued these markers, with confidence on increased user engagement and
monetization, new products, reducing costs, and around innovation. And while
management did not show any of this confidence in Q1, more tellingly they did not show
any concern about these key issues, giving optimism that once the pandemic is past, they
can continue executing.
Considering low market expectations, positive longer-term macro tailwinds,
management's appropriate alignment, and strong positive fundamental momentum for
the company based on management's inflection in confidence, there appears to be
material near-term and long-term equity upside for FB.
Facebook is building and engaging products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and in-home devices. The company's products include: Facebook, which enables people to connect, share, discover, and communicate with each other on mobile devices and personal computers; Instagram, which is a place where people can express themselves through photos, videos, and private messaging, and explore their interests in businesses, creators and communities; Messenger and WhatsApp, which are messaging applications; and Oculus, which connects people through its Oculus virtual reality products.
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