Weekly Equity Idea Highlight - 2018 02 28
Market expectations for FB are currently very pessimistic. The market is expecting UAFRS (Uniform) ROA (ROA') to fade from 61% in 2016 to 30% in 2021, with Uniform Asset growth slowing from 50%+ a year to 30% a year going forward. However, FB's ROA' has improved for the past three 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 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 Q4 2017 earnings call continued to confirm the positive signals seen since the Q3 2015 earnings call. While markets are showing some pause about FB's execution in adjusting their strategy, management's continued growing confidence about their outlook shows reason to expect continued strong execution. Management showed continued confidence in terms of their execution for 2017, their ability to navigate their initiatives to improve content and Value Optimization, and about the returns they can see from their investments in content and in long-term innovation. 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.
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- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
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