Earnings season has kicked off this week and this gave us a glimpse into the damage COVID-19 has done on the economy. While it was obvious in Mar 2020 that earnings for companies directly caught in this crisis such as tourism and restaurants would be obliterated, quarterly reports from digital companies have displayed a certain level of earnings resilience on top of their fortress-like balance sheet.
“I’ve always believed that in times of economic downturn the right thing to do is keep investing in building the future.“
Mark Zuckerberg
Earnings Update
Revenue for Q1 grew 17% YOY to $17.4 billion. The company experienced a strong start to the quarter but saw a drop in advertisement revenue in March. The decline has since stabilized and Facebook has guided that Apr 2020 revenue would be flat compared to the same period a year ago.
During this period, there was a strong growth in the gaming and eCommerce advertisement demand. This offsets the significant declines in travel and automobiles, as these industries were hit the hardest. The increase in sales was largely due to increased engagement at lower ad prices.
Impact of COVID-19 on Facebook
Facebook saw increased engagement due to shelter-in-place measures but some of this increased engagement will be lost once measures are relaxed in the future. Engagement increased by ~10% YOY across all measurements, compared to ~7% in the previous period. Demonstrating Facebook’s attractiveness as a platform for users to connect with their friends and family.
COVID-19 has accelerated pre-existing long-term trends, dramatically increasing online private social communication.
Zuckerberg emphasized that ensuring that Facebook’s services are stable and reliable is a top priority. It is important to appreciate the platform’s ability to scale up to the sudden spike in usage because of the company’s significant investments in infrastructure over the past 4 years.
The quality that I look for in managements is the “capacity to suffer.” The “capacity to suffer” is key because often the initial spending to build on these great brands in new markets has no initial return.
Tom Russo
Facebook has indeed backed up their claims, by constantly outspending their depreciation charges to invest for growth. Their CAPEX/Depreciation ratio has constantly exceeded 1 and we can observe that from 2016 to 2019, they have ramped up capital expenditures (CAPEX) on building data centers.
To put these numbers in perspective, Twitter, Snapchat, and Pinterest collectively spent $2.2 billion in CAPEX for the past five years, while Facebook spent $15.1 billion in 2019 alone.
The company has highlighted that it will continue to spend aggressively on CAPEX as it seeks to expand its footprint. Management has guided for CAPEX spending to be between $14 and $16 billion in 2020.
Facebook’s ability to invest for the long run, at the cost of short term results is remarkable. Or in Tom Russo’s words – a company’s capacity to suffer. And this is largely due to two factors:
- Founder led company with Zuckerberg as the controlling shareholder.
- Strong margins
In Q1’20 earnings call, Zuckerberg put it across best, “This economic pullback has certainly reinforced for me the importance of maintaining high margins. Our financial position has allowed us to continue investing in building products and making investments.”
Plans for Growth
Facebook has taken a pivot into regulating the platform and limiting the spread of misinformation amidst COVID-19. This includes working with health officials and governments in delivering critical information to its users and rebranding itself as a reliable source to obtain information.
This lockdown also highlighted the importance of allowing users to connect via video. Facebook has also rapidly announced product improvements around video communications presence in three categories – video calling, video rooms, and live video.
Facebook is also targeting a share of the eCommerce pie, from competitors like Amazon and Shopify. By allowing businesses to establish a virtual store within their apps, customers can now buy directly through the Facebook & Instagram platforms.
Setting up a website is expensive and challenging for many SMEs, especially on such short notice due to the lockdown. In Singapore, we have seen many F&B businesses set up a Facebook page to reach out to their customers.
One of Facebook’s biggest investment is their partnership with Jio Platforms in India. Facebook invested $5.7 billion into this deal since India is the largest user base for Facebook and Whatsapp. They seek to bring together its apps with JioMart in targeting SMEs and create a better shopping experience.
Conclusion
Facebook has demonstrated proactiveness in upgrading itself in their reaction to this crisis, as we compare its years of digitalization progress to that of most companies, which has been compressed into two months. Furthermore, Facebook is continuously investing to capture market share by making themselves a reliable platform for people to connect and for businesses to reach out to their customers.
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