Blogs -Facebook Stock: When Free Cash Flow Isn’t Enough

Facebook Stock: When Free Cash Flow Isn’t Enough


February 04, 2020

author

Beth Kindig

Lead Tech Analyst

This article was originally published on Forbes on Jan 30, 2020,03:32pm EST

Facebook’s free cash flow and profit margins are some of the best in the S&P 500. Profit margins are at 35 to 40 percent, free cash flow margins around 19%, and annual growth has exceeded 25 to 30 percent for many consecutive years.

Despite this, Facebook’s stock price has struggled to keep up with the stellar gains of its mega-cap tech peers. Facebook’s previous share price high was in July of 2018 at $217.50. Recently — and very briefly — the stock traded a few dollars higher at $222 leading into the earnings report yesterday. The stock failed to hold and is now down 6% following earnings.

The issues that Facebook has encountered are not easily found in the financials. Facebook fires on all cylinders when considering Warren Buffet’s investing discipline to seek companies with strong free cash flow and no debt. Instead, Facebook’s issues are at the product level, which discounted cash flow analysis does not help to detect.

Primarily, the critical risk is that Facebook’s product, as it was built, was not designed to co-exist with privacy. The concerns that both consumers and regulators are raising require much more than a bandaid; they require an entire overhaul.

You can see some evidence of this in the number of privacy engineers the company employs — totaling 1,000 per the Q4 earnings call. This is double the amount of Google at 500 engineers, despite Google making twice the ad revenue as Facebook.

Before the stock dropped in Q2 2018,I had covered a few of the technical issuesFacebook was facing across its suite of apps. I encouraged investors to consider Cambridge Analytica the norm rather than a fleeting headline scare by breaking down the complexity of Facebook’s privacy issues. Nearly two years later, these complexities continue to haunt the company.

YCHARTS

Investors who chose Facebook over Microsoft, Apple or Google saw very few gains over the past eighteen months while tech peers gained up to 70%.

Review of Facebook’s Q4 Earnings

Facebook beat on the top and bottom line on Wednesday with EPS of $2.56 compared to analyst estimates of $2.53. Revenue rose 25% to $21.08 billion compared to estimates of $20.89 billion with an average revenue per user of $8.52.

Key metrics, such as daily active users (DAU), came in as expected with DAUs of 1.66 billion compared and monthly active users (MAUs) of 2.5 billion.

However, costs and expenses for full year 2019 rose 51% to $46.71 billion compared to full year 2018, and this partly caused the stock to decline. On a quarterly basis, expenses grew 34% compared to the previous quarter.

Sign up for I/O Fund's free newsletter with gains of up to 403% - Click here

Net income was up only 7% at $7.3 billion compared to 61% growth in 2018. Net income declined 16% from full year 2018 to full year 2019.

Privacy issues are driving some of these expenses, with over 1,000 engineers working on privacy and a headcount that has grown 26% year-over-year to nearly 45,000 employees.

Guidance also wasn’t as encouraging as analysts had hoped, with Chief Operating Officer, Dave Wehner, stating they expect some deceleration in Q1 compared to Q4’s growth rate on a year-over-year basis. 

Facebook’s Product: Move Fast, Break Things

Facebook’s products have inherent issues that are hard to see in the financials. What weighs on the company are not the fines or the privacy regulations, per se, as many tech companies have been able to comply with Europe’s GDPR and California’s CCPA with little impact.

What weighs on Facebook’s stock is that the company’s value proposition to advertisers is they provide the best audience data on the market, which requires tracking people on mobile devices and browsers.

Perhaps one of the more important notes on the earnings call was the release of a new statistic, “Family Average Revenue per User,” which will divide revenue by total users across Facebook, Messenger, Instagram and Whatsapp. Wehner confirmed the company would no longer share Facebook-only stats by late 2020, which implies the company expects Facebook to be weaker than Instagram in the long-term.

As of now, Facebook is stronger than the family suite with $8.52 ARPU versus $7.38.

The term “Family Average Revenue per User” is a bit misleading because Facebook has a product called Audience Network that is not included in these statistics. Facebook’s Audience Network is an ad exchange that brokers ads and collects data across many applications that Facebook does not own.

Advertisers on Audience Network place the ad through Facebook’s news feed even though the ads often don’t appear on Facebook or Instagram. This is one example of how tracking users is engrained in Facebook’s products. (On a side note, the word Family can hardly apply to any ad exchange with this level of ad serving which extends to 40% of the top 500 apps that Facebook does not own and 1 billion+ users that are outside social networks).

Mobile software, called software development kits, are powerful enough to detect your activity across the other applications on the device. Advertising companies also use pixels as you browse the web.

As I had pointed out nearly two years ago, the untangling of this data collection will not be easy nor cheap.

If regulations or reputation issues truly force Facebook to build privacy into the products, then Facebook won’t be quite the cash machine that it is today. For instance, Facebook’s average revenue per user in the United States is at $41 ARPU in the United States and $7 ARPU globally compared to Snap’s $2 global ARPU and Pinterest’s $1 ARPU. This premium that Facebook charges comes from having more data on their users that extends beyond the data collected in Facebook’s family of apps.

There were a few fissures in this earnings report and on the earnings call that show the effects that privacy changes can have on Facebook’s products. For instance, Google and Apple have begun to limit Facebook’s tracking across browsers and operating systems, which is what I described would happen when many thought privacy was a temporary issue.

“First the recent regulatory initiatives like GDPR and now CCPA have impacted, and we expect will continue to impact our ability to use such signals. Secondly mobile operating systems and browser providers, such as Apple and Google, have announced product changes and future plans that will limit our ability to use those signals ...”

Q4 2019 Earnings Call: https://s21.q4cdn.com/399680738/files/doc_financials/2019/q4/Q4'19-FB-Earnings-Call-Transcript.pdf

What’s Next for Facebook

We’ve seen Facebook attempt to pivot away from ads and data collection with Oculus Rift, the augmented reality headset acquisition for $2 billion, and Libra, the cryptocurrency project that dissolved. Facebook may have a chance to reinvent itself with the upcoming launch of Whatsapp Pay. This is a nod towards WeChat’s WePay, a popular method of payment in China through the popular WeChat social network.

Moving forward, Facebook will need to rest on the strength of its applications, rather than on the data collection methods the company has used outside the Family of apps to collect audience data. The company certainly has impressive levels of cash to accomplish this.

Gains of up to 2,160% from our Free Newsletter.


Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!

2,160% on Nvidia

675% on Bitcoin

*as of Mar 27, 2025

Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.

If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 3,430% on Nvidia, 915% on Chainlink, and 1,020% on Bitcoin. The I/O Fund is audited annually to prove it’s one of the best-performing Funds on the market, with returns that beat Wall Street funds.

beth
head bg

Get a bonus for subscription!

Subscribe to our free weekly stock
analysis and receive the "AI Stock: 5
Things Nobody is Telling you" brochure
for free.

More To Explore

Newsletter

Silhouette illustration of Larry Ellison, Oracle's CTO and executive chairman.

Oracle Stock Outlook: Revenue Could Double by FY2029, yet Targets Seem Lofty

Late in 2024, Oracle outlined an ambitious plan to nearly double its revenue by fiscal 2029, hinging on long-term growth in enterprise AI and cloud spending. Oracle sets itself apart from its hypersca

April 04, 2025
I/O Fund reports a 210% cumulative return, surpassing top tech ETFs and institutional portfolios with a 35% gain in 2024. Source: YCharts and InsiderMonkey.

I/O Fund Reports 210% Cumulative Return -- Ranking Above Wall Street's Best

In 2024, I/O Fund posted a 35% return, significantly outperforming popular tech ETFs, which recorded an 8% return over the same period. On a cumulative basis, the results translate to a remarkable 219

March 31, 2025
Chart showing retail investor losses compared to institutional investors, highlighting market volatility and the impact of high-frequency trading.

The Harsh Truth: Retail Investors Take the Brunt of Market Losses

Retail investors face significant disadvantages in the stock market, often underperforming institutional investors by a wide margin. Studies show that high-frequency trading firms dominate market acti

March 28, 2025
NVIDIA Blackwell Ultra GPU unveiled at GTC 2025, revolutionizing AI and HPC with unprecedented efficiency and power.

NVIDIA Blackwell Ultra Fuels AI & HPC Innovation, Efficiency and Capability  

NVIDIA’s latest Blackwell Ultra GPU, unveiled at NVIDIA GTC 2025, is transforming AI acceleration and high-performance computing (HPC). Designed for the “Age of Reasoning,” these cutting-edge GPUs del

March 21, 2025
Illustration of a futuristic AI data center featuring NVIDIA’s GB200 Superchip

NVIDIA’s GB200s for up to 27 Trillion Parameter Models: Scaling Next-Gen AI Superclusters

Supercomputers and advanced AI data centers are driving the AI revolution, enabling breakthroughs in deep learning and large-scale model training. As AI workloads become increasingly complex, next-gen

March 21, 2025
Nvidia CEO Jensen Huang discusses AI market dominance at GTC 2025, addressing demand concerns and future growth projections.

Nvidia CEO Predicts AI Spending Will Increase 300%+ in 3 Years

Nvidia has traversed choppy waters so far in 2025 as concerns have mounted about how the company plans to sustain its historic levels of demand. At GTC, Huang threw cold water on many of the Street’s

March 20, 2025
AI data centers are driving the AI revolution, but their soaring energy demands pose sustainability challenges. With power consumption projected to rise 160% by 2030, data centers are integrating brown, clean, and renewable energy sources. Goldman Sachs predicts 40% of new capacity will come from renewables, but can solar, wind, and nuclear sustain AI’s 24/7 operations? Explore how hyperscalers are evolving their energy strategies to meet growing AI demands.

AI Data Center Power Wars: Brown vs. Clean vs. Renewable Energy Sources

AI data centers are at the heart of the AI revolution, but their massive energy demands raise critical questions. With power consumption expected to grow 160% by 2030, data centers are turning to a mi

March 19, 2025
Natural gas pipelines supporting AI data centers as energy demand surges, with Texas and Louisiana emerging as key hubs for AI infrastructure growth.

Why Gas Pipelines Are the Unsung Heroes of AI Data Center Expansion

Natural gas is emerging as the backbone of AI data center expansion, with demand expected to reach up to 6 billion cubic feet per day by 2030. As AI-driven infrastructure surges, data centers are turn

March 19, 2025
Alibaba’s AI revenue growth accelerates, but remains significantly lower than U.S. tech leaders like Microsoft, highlighting China’s competitive AI landscape.

Alibaba Stock: China Has Low AI Revenue Compared to United States

Alibaba’s AI-driven cloud revenue is surging with six consecutive quarters of triple-digit growth. However, its AI earnings remain a fraction of what U.S. tech giants report, with Microsoft leading at

March 14, 2025
By 2030, AI data centers may consume 9% of U.S. electricity as GPU power usage surges, with Nvidia’s GB200 reaching 2,700W. To ensure sustainability, data centers are adopting long-term PPAs and exploring high-efficiency energy sources like nuclear and SOFCs.

Unlocking the Future of AI Data Centers: Which Fuel Source Reigns Supreme in Efficiency?

AI data centers are projected to consume 9% of U.S. electricity by 2030, driven by soaring GPU power demands, with Nvidia’s GB200 reaching 2,700W—a 300% increase over previous generations. As AI racks

March 13, 2025
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio, a forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2025