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Why I’m Buying More Facebook After the Final Earnings Report of 2019

By Nicholas Rossolillo – Feb 1, 2020 at 10:09AM

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Don’t sweat the big operating expense increase.

In spite of all sorts of controversy, Facebook (META 1.21%) is successfully working its way through a tumultuous couple of years. Data privacy scandals, political backlash, and a record fine levied by the Federal Trade Commission (FTC) haven't been able to halt the stock's advance. Shares are up 56% over the past three years, as ad revenue and global active user counts keep rising.  

2020 got off to a good start, too, but Facebook stock fell more than 6% on Thursday, following the company's Q4 2019 earnings report. Another big one-time jump in expenses during the quarter was the culprit. However, the stock's breather is an opportunity for those social media investors looking years down the road versus the ultra-short term.

A man in the background pressing a Facebook "like" icon in the foreground.

Image source: Getty Images.

What just happened?

Facebook has been dealing with a long dirty-laundry list of challenges. What started as criticism regarding the privacy issues that came to light after the 2016 U.S. presidential election has turned into a general lashing of the platform from just about everyone.

The social media leader -- home of the namesake app as well as Instagram, WhatsApp, and Messenger -- has responded by spending gobs of cash and hiring thousands of employees to update its platform and make it safer for users. Additionally, it recorded the $5 billion FTC fine in the second quarter of 2019 and a $550 million settlement related to the collection of users' facial recognition data from 2011 to 2015 (in violation of the Illinois Biometric Information Privacy Act) in Q4.

Period

Employee Head Count

YOY Increase

Operating Expenses

YOY Increase

Full year 2018

35,587

42%

$30.9 billion

51%

Q1 2019

37,773

36%

$11.8 billion

80%

Q2 2019

39,651

31%

$12.3 billion

66%

Q3 2019

43,030

28%

$10.5 billion

32%

Q4 2019

44,942

26%

$12.2 billion

34%

Data source: Facebook. Chart by author. YoY = year over year.

In spite of the huge expense increases, Facebook ended 2019 with earnings per share down only 15% thanks to a 27% increase in revenue -- including 25% growth in the fourth quarter, which bested expectations. Free cash flow (revenue less cash operating and capital expenses) actually ended the year 38% higher at $21.2 billion, although that excludes the FTC fine as it has been recorded but not yet paid.

Facebook's opportunity is still huge

Operating expense growth isn't going away anytime soon, but a slowdown is right around the corner. Management reiterated its guidance for operating expenses of $54 billion to $59 billion in 2020: a 15% to 21% increase over 2019. However, the revenue outlook also remains unchanged, with a low- to mid-single-digit percentage point deceleration expected in the first quarter of 2020 in relation to the fourth quarter of 2019. Since revenue was up 25% in Q4, that seems to imply at least 20% revenue growth.  

Updating privacy options -- including the rollout of new privacy checkup tools that allow users to control who can access their updates and profile, options to see fewer political ads, and ad transparency to help users see who is trying to reach them -- is only part of the expense equation. Facebook continues to spend to grow its global network of data centers to support its cloud computing platform. New capabilities the social network is working on include digital payments through WhatsApp, messaging tools for businesses, and e-commerce sites like Facebook Marketplace and Instagram Shopping.  

All of those industries adjacent to Facebook's core social network platform are massive, worth hundreds of billions of dollars a year. Double-digit revenue growth is in the cards for the foreseeable future, and easing expense headwinds should enable a return to bottom-line growth in 2020. Add to that the company's share repurchase program, which had $4.9 billion remaining at the end of 2019 and just got another $10 billion in repurchase authorization added to it, Facebook looks like a value trading for 22 times its projected 2020 earnings. Post end-of-2019 report, I'm still a buyer of this stock. 

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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