Weekly Equity Idea Highlight - 2018 05 02
Market expectations for FB are currently very pessimistic. The market is expectingUAFRS-based (Uniform) ROA (ROA') to fade from 65% in 2017 to 15% in 2022, with Uniform Asset growth slowing from 50%+ a year to 30% a year going forward. However, FB's ROA' has improved for the past five years, and management continue to have multiple levers to pull to drive strong growth and ROA' expansion, thanks to their strong brands and their positioning in the digital advertising market. As such, market expectations, which appear to solely be focused on regulatory downside, appear too pessimistic, spelling potential for equity upside.
FB's 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.
Furthermore, the Q1 2018 earnings call continued to confirm the positive signals seen since the Q3 2015 earnings call. Tellingly, even after having to face the headline issues and to testify in front of congress, FB management showed confidence and excitement during this call about their ability to target ads appropriately for their customers, their ability to invest for growth, the changes the are making to the platform to drive usage and their customer growth overall. Management clearly is seeing building fundamental momentum that will allow them to continue to accelerate growth going forward.
Considering low market expectations, positive longer-term macro tailwinds, management's appropriate alignment, and strong positive fundamental momentum for the company in the coming quarters based on management's communication, 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.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.