- Facebook Inc. has disclosed an authorization to repurchase $6B worth of stock, a first for the social networking giant.
- Also, reports of misreporting of ad metrics surfaced once again which sent the stock lower in mid-week trading.
- Should investors be worried of the latest measurement controversy and what does the buyback mean for FB stock?
The big news over the weekend has been Facebook Inc.'s (NASDAQ:FB) announcement to buy back stock worth $6B, starting in Q1 2017. This was a first in the history of the company. While it can come across as a surprise for a growing company to announce a share repurchase offering, the recent drop in FB stock price could have forced the management into action. The FB stock price is down by over 12% from its October 24th close price of $133.28, all in a matter of 19 trading sessions. The recent downtrend has been in stark contrast to the 27% gain in the stock price through the year up to the October high. Does the management believe that the stock is undervalued at the current levels? What does it mean for investors? (See also: Is Facebook Inc. (FB) Stock A Big Short?)
Facebook's $6B Buyback And What Does It Mean For Investors?
In an 8-K filing with the SEC, dated November 18, Facebook disclosed that the BOD (Board of Directors) had authorized the company to repurchase nearly $6B worth of stock. Quoting from the SEC filing:
On November 18, 2016, the Board of Directors of Facebook, Inc. (the "Company") authorized the Company to repurchase up to $6.0 billion of its Class A common stock. The repurchase program will go into effect in the first quarter of 2017 and does not have a fixed expiration. The timing and actual number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. The program will be executed consistent with the Company's capital allocation strategy of prioritizing investment to grow the business over the long term.
It's clear from the content of the filing that the share buyback will in no way affect the company's investment strategy. Also, with $26B+ worth of cash and marketable securities balance and no debt on the balance sheet (at the end of the September quarter), the company should have no issues in financing the share repurchase program as well as any investment opportunities which could come up.
The company can buy back 50M shares at an average price of $120, which should help to curtail the constant dilution which FB stock has registered over the years. The company's outstanding shares count has grown from 2.138B shares in May 2013 to 2.872B shares at the end of Q3 2016. A large part of this has been driven by the constant rise in share-based compensation, with Facebook doling out $3.2B worth of stock based compensation over the last twelve months. Hence, the share buyback should reduce the dilutive impact of the share-based compensation, and aid EPS growth marginally ($6B buybacks can help to reduce current float by 1.7%). With the management warnings of an earnings slowdown on account of increased investment activity, this (reduction in outstanding shares) will be a much-needed tailwind for FB stock.
Will Ad Metrics Misreporting Hurt Facebook's growth?
Another issue which had been in news recently was the issue of misreporting of ad metrics. The social media giant announced mid last week that it had misreported 4 metrics to advertisers. The news sent the stock lower in mid-week trading. However, in what came as a consolation, the company announced that none of them affected the company's billing. This comes on the heels of another controversy around the misreporting of the 'average video watched' metric. The obvious question out of these controversies is whether or not advertisers will move away from the platform. Event Solutions Chief Marketing Officer had an answer to these concerns. (See also: Has The Trump Victory Created A Buying Opportunity In FB Stock?)
Event Solutions Chief Marketing Officer, Michael Jackson, had an answer to these concerns. As reported by thestreet.com, speaking on CNBC's 'Power Lunch' show, Jackson stated:
Facebook is a very effective medium for advertisers, specifically those brands like AmEX (AXP), Coca Cola (KO), Walmart (WMT) that are really trying to make the shift from being kind of a mass market broadcast television advertiser to a social engagement brand. So the brands are convinced that it works, but transparency and clarity as it relates to viewership is an absolute imperative for Facebook going forward.
However, He also warned: They're happy with the results but again when you look at pricing in this whole digital space, the lack of clarity and integrity around what I'm paying for versus the results that I'm achieving, it's a grey area. It's fuzzy.
To sum up, the recent fiasco is unlikely to drive advertisers away from the Facebook platform as long as the ROI of advertising on the platform is better than the other available online advertising platforms. The company definitely needs to work on the transparency of its metrics, but the recent fiasco is unlikely to have much of an impact on Facebook's growth, for now.
The recent ad metrics fiasco is unlikely to have much of an impact on advertisers and their budgets as of now since these errors do not impact their bills. As long as the Facebook platform can continue to deliver higher ROI's, advertisers will continue to flock to the platform. Also, while the recently announced buyback will not significantly impact EPS growth, the buyback should help to minimize the dilutive impact of Facebook's generous share-based compensation payouts. The move also serves as the FB board's vote of confidence in the Facebook stock, which should provide some sort of support to the stock price in these volatile times.
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