Thirty percent revenue growth. Hard to argue with that. Personally, I have not been fond of Facebook (FB) , the stock. My impression in the past has been one of a poorly managed company that had regularly experienced headline exposure to negative headlines. Likely, if you are reading this, you already know that Facebook crushed Q4 expectations for earnings and revenue on Wednesday night. Here's the deal. I think the bull case begins much more so with that 30% revenue growth than with the 20 cents beat on profit. The firm's effective tax rate dropped in one year from 43% to 14%. That's something that happens once in a generation.
The Keys To FB
First and foremost, we have to talk about advertising. That's where it begins and ends for this firm. Obviously, if you have not realized it, you are the product here. Mobile advertising revenue for the firm showed an increase of 93%, sustaining last years growth of 89%. We also know that the firm was spending big on increasing oversight meant to protect user privacy. Many have felt that this would squeeze margin. A quick look at the balance sheet tells that story immediately. Operating margin for full year 2018 printed at 45%, down from 50% in 2017. Not really too bad when one thinks about it.
Here's how that breaks down. The firm did spend roughly $3.4 billion more in aggregate in 2018 than they did in Q4 2017. That number was up against a $3.7 billion increase in revenue derived from advertisers, and a $2.1 billion reduction in provisions made for the tax man. Solid? Yes, but far less impressive without the favorable tax comparison. The firm has to keep the trajectory for growth in advertising right where it is, maybe even steepen it somehow.
Daily active users and monthly active users continued to grow, each at a 9% clip for the most recent month. Given the popularity of the Instagram app, the firm is put in the position of aggregating performance across Facebook, Instagram and WhatsApp. CEO Mark Zuckerberg has made clear his intention to create one encrypted messaging system across the three platforms. This in theory will create increased quality in the pool of available data for sale to advertisers. That's bullish. Regulators may view this differently. That's bearish.
What I Am Going To Do
I plan to get long February 1st (tomorrow) FB $165 puts, and partially subsidize the expense by writing February 1st FB $160 puts. The whole thing should cost a net dollar or so. I would short the stock outright, but that's too dangerous. This way I risk $1 to create potential profit of up to $4 net.