Facebook: This Graph Shows That The Company Has Peaked
This is the fourth edition of my series on FAAMG stocks – Facebook, Amazon, Apple, Microsoft and Alphabet/Google. Previously, I concluded that Apple was one of the “most efficient, profitable and cash-rich companies in the world”. I went on to say that Amazon’s appetite for world domination was fierce. Lastly, I pointed out that Microsoft’s impressive success in the past five years has been driven by the cloud transition architected by CEO Satya Nadella.
Today, I turn to Facebook, and tell its unique story using the graph below, provided by Stock Rover.
A scalable business model
Let’s look first at one of my favorite measures of efficiency: sales per employee (blue line above). This is the “more for less” factor: the more a company can grow the top line with fewer resources, the better.
Facebook’s business model is designed for efficiency gains. Think about it: platform usage (measured by daily and monthly active users) is the key driver of advertising revenues. The good news is that social media usage tends to be “sticky” and self-reinforcing. That is, the more often someone logs into Facebook or Instagram and engages with his or her social network, the more likely it is that the user will come back for more. Therefore, revenues tend to increase consistently over time.
The even better news is that Facebook’s infrastructure (data centers, personnel, etc.) can be easily leveraged to grow the audience at scale. In other words, another active user on the platform or extra dollar in revenues does not require an extra dollar or so in investments to support it.
This is basically the story that the blue line above tells. Until around 2018, Facebook kept seeing increases in usage and revenues, while the growth in employee count was much more modest. In 2018, Facebook’s sales per employee was almost half a million dollars more per year than Alphabet’s – the other tech behemoth in the online ad business.
Outstanding performance has peaked
But then, things started to change.
Facebook came under pressure for several issues ranging from facilitating the spread of fake news and malicious content to accusations of data sharing. The company’s response was swift and took the form of substantial investments made in security and community moderation. The number of Facebook employees nearly doubled to 44,000 between mid-2018 and the most recent quarter.
At this point, the company’s impressive financial performance showed clear signs of having peaked. Sales per employee decreased by almost $200,000 in only two years. ROE, or return on equity, dropped from a very solid 26% in 2018 to a much more modest 18% at the end of 2019. Meanwhile, as Facebook continues to mature, annual revenue growth decreased from nearly 50% to a still strong but much less exciting 24% now.
Last few words
Facebook has been an excellent performer since the company went public, in 2012. However, the company’s financial results seem to have peaked around 2018. Higher costs and decelerating revenues suggest that Facebook’s best days may have been left behind – and the current “boycott Facebook” campaign will probably not help it recover in the short term.
Explore more data and graphs
The data used in this report was provided by Stock Rover. I have been impressed with the breadth and depth of information on markets, stocks and ETFs that this platform provides. Stock Rover also helps to set up detailed filters, track custom portfolios and measure their performance relative to a number of benchmarks.
To learn more, check out stockrover.com and get started for as low as $7.99 a month. The premium plus plan that I have will give you access to all the information that went into my analysis and much more.
(Disclaimers: the author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Apple Maven)