With $55 billion in cash on its balance sheet at the end of 2019, Facebook (FB) should have little trouble financing major investments at a time like this.
That's worth keeping in mind while digesting a pair of major Tuesday stories:
- The Financial Times reported that Facebook is looking to buy a multi-billion dollar stake in top Indian mobile carrier Reliance Jio. The paper added that a deal for a 10% stake was close before lockdowns caused by the COVID-19 pandemic got in the way.
- After the bell on Tuesday, Facebook disclosed (not too surprisingly, particularly after Twitter's (TWTR) pre-announcement) that it has "seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19." The company also mentioned it has seen major traffic spikes in the countries hardest-hit by the virus, with total messaging activity rising over 50% and voice/video calls on Messenger and WhatsApp more than doubling.
Jio has racked up more than 370 million subscribers with the help of dirt-cheap mobile data plans that are now a big reason why India leads the world in terms of per-user mobile data consumption. Facebook's core services are estimated to have more than 300 million Indian users, and WhatsApp, which is widely used as an SMS substitute in India, has reported having more than 400 million users in the country.
With Jio having also launched a slew of digital content, payments and (more recently) e-commerce services, Facebook would have a number of options for integrating its services. The company could also strike deals with Jio to have its apps pre-installed on Jio-sold phones and (provided regulators didn't object) not count against data buckets.
Meanwhile, the big activity spikes Facebook is seeing in countries hit hard by COVID-19 will likely require the company, which said on Tuesday it's adding capacity as it deals with record traffic, to hike its capital spending budget. Back in January, Facebook guided for 2020 capex of $17 billion to $19 billion, which compares with reported 2019 capex of $15.7 billion.
Should Facebook have to spend, say, $20 billion or $22 billion on capex this year, it would put a dent into a cash-flow statement that's already set to take a hit from ad sales pressures. But between its cash balance and the fact that it was poised to generate more than $20 billion in free cash flow this year before COVID-19 began taking a toll, the company will have no trouble footing such a bill.
And if (as is certainly possible) some meaningful portion of the Facebook, Messenger, Instagram and WhatsApp users who have been stepping up their usage in recent weeks don't bring their usage all the way back to prior levels once the pandemic subsides, there should be a top-line payoff once ad spending starts rebounding.