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User Numbers Dispel the Bear Case for Facebook Stock

Vince Martin

Facebook (NASDAQ:FB) stock is cheap. There’s really no argument on this point. FB trades at less than 20x 2019 earnings-per-share estimates. The argument, however, is that maybe FB stock should be cheap. After all, bears argue, there’s no shortage of risks here. United States regulators have fined the company $5 billion. But more importantly, skeptics believe Facebook’s users are likely to decline.

User Numbers Dispel the Bear Case for Facebook Stock

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There’s the argument that privacy worries will lead users to flee. There’s the argument that teenagers are leaving the platform for other offerings, including Snap (NYSE:SNAP). Competition from Snap, Twitter (NYSE:TWTR) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) for both users and advertising dollars remains intense.

And so, yes, FB stock might be cheap on a forward basis — but its core platform is set for a decline.

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The problem with that argument is that Facebook users aren’t leaving. In fact, Facebook’s base is growing — even in the U.S. and Canada, where one might think its market was saturated. And engagement doesn’t seem to have faltered either.

If that holds, Facebook stock is just too cheap.

Facebook’s Incredible Reach

Facebook’s user numbers are simply astounding. The company ended the second quarter with over 2.4 billion monthly active users (MAUs). Nearly 1.6 billion users visit the platform every day.

To be fair, those numbers probably are inflated. Facebook itself wrote in its Securities and Exchange Commission Form 10-K that it estimated 11% of fourth-quarter MAUs came from duplicate accounts. The company believes another 5% of accounts could be false.

But Facebook also believes that most of the issues are occurring in developing markets in Asia — and specifically called out Indonesia, the Philippines and Vietnam. And MAUs aren’t quite as important as daily users in terms of visitation and usage.

Even if those numbers are right, roughly 2 billion people use Facebook every month. That’s over one-fourth of the world’s population including children, and excluding China, it’s nearly one-third.

In the U.S. and Canada, FB’s penetration is even greater. The company’s 244 million MAUs account for almost two-thirds of the total population. Even assuming the numbers are modestly inflated, over half of the citizens of those two countries use the Facebook platform on any given day.


The Importance of Users to FB Stock

It’s important to note that those figures don’t include Instagram or WhatsApp; they represent only usage of the namesake platform. And that usage is growing — even in developed markets.

To be sure, that growth in the U.S. and Canada, in particular, is slowing. Per figures from the company’s Q2 earnings slides, both daily and monthly active users rose less than 2% year-over-year. In Europe, the increases were less than 3%.

But overall, growth continues. MAUs as a whole increased 8% year-over-year. Facebook has added 116 million daily active users in the last four quarters. To put that in perspective, Snap posted the same growth on a percentage basis in its second quarter — and SNAP stock continued its torrid run. Snapchat’s year-prior base was roughly one-eighth the size of Facebook’s.

The increases are coming in developing markets — and that’s where Facebook has the biggest reach. Just 30% of second-quarter daily users came from the U.S., Canada and Europe. The other 70% of markets grew daily users at a rate of over 10%.

Obviously, users alone don’t pay the bills. Engagement matters. If those users are using Facebook less, that would put pressure on revenue and profit growth. But, at least measured by the ratio of MAUs to DAUs, that’s not happening. Overall, MAUs have stayed remarkably steady at about 1.5x the DAU figure. Even in the U.S. and Canada, the ratio was virtually unchanged between Q2 2018 and Q2 2019.

How Facebook Stock Rallies

The importance of developing markets to Facebook goes beyond their proportion of users. There’s a lot more room for Facebook to grow revenue-per-user in those markets as well. Average revenue per user (ARPU) per quarter in the U.S. and Canada was $33.27 in the second quarter. It was $3.04 in the Asia-Pacific region, and $2.13 in the company’s “Rest of World” category.

Obviously, those markets aren’t going to match U.S. levels. But there’s still much more room for ARPU to grow for 70% of users — even as ARPU still is growing sharply in developed markets.

Meanwhile, the elevated spending this year — guidance for which led FB stock to plunge after last year’s Q2 — should moderate going forward. There’s still profit growth left in the namesake platform.

And that doesn’t even include WhatsApp and Instagram, whose importance I detailed last month. Those two businesses could be worth as much as $225 billion — yet likely aren’t contributing all that much to earnings at the moment.

Plus there’s a ton of cash on the balance sheet: $48.6 billion at the end of Q2. Back that out, along with the associated interest income, and FB trades at 18x next year’s EPS estimates. That’s simply too low for a company whose supposedly challenged core platform continues to grow. Eventually, even bears will figure that out.

As of this writing, Vince Martin did not hold any of the aforementioned securities.

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