AQR Capital’s holdings in Facebook
AQR Capital lowered its holdings in Facebook (FB) by decreasing the number of shares held in the company from 4,158,402 in 3Q14 to 3,040,526 in 4Q14. This represented a 27% decrease. The company made up 0.49% of the fund’s fourth-quarter portfolio.
Facebook is a social networking channel. The company had 1.39 billion total users and 890 million daily active users worldwide as of December 2014.
FB generates substantial revenue from advertising and fees associated with its Payments infrastructure. This enables Facebook users to purchase virtual and digital goods from developers.
In 2014, Facebook acquired WhatsApp and Oculus to improve its next generation of communication and computing platforms.
FB is part of the iShares US Technology ETF (IYW) with a stock weight of 4.6%.
Strong mobile growth
Mobile is the primary driver of Facebook’s growth. 1.19 billion people access the site on mobile devices. The company’s Instagram, Messenger, and WhatsApp have crossed 300 million, 500 million, and 700 million monthly active users, respectively.
According to a report from comScore, FB’s reach on smartphones in the United States is 74%, while Google (GOOG) properties such as Google Play, YouTube, and Google Search come in second place.
The increasing preference of FB users for mobile could positively impact the company’s flourishing business in mobile advertising. Mobile represented 69% of the company’s 4Q14 advertising revenue compared to 66% in 3Q14 and 53% in 4Q13.
4Q14 operating margin
Facebook’s profitability declined during the fourth quarter of 2014. Generally accepted accounting principles (or GAAP) operating margin fell to 29% compared to 44% in the same period last year. This was due to a rise in stock-based compensation and marketing expenses.
FB expects its operating margin to decline in 2015. The firm is planning to increase investments in several areas like Messenger, WhatsApp, and Search. FB believes these investments will be profitable and beneficial in the long run. The company thinks the investments will drive future revenue.
Social network monetization
As evident from the numbers in the figure above, FB is continuing to translate its social network into a revenue-generating platform.
4Q14 revenue originating from advertising was $3.59 billion, showing a massive 53% increase compared to the prior-year period. According to a Blueshift research report dated March 30, 2015, Facebook ranked second just behind Google (GOOG) among seven platforms in “social media ROI” (or return on investment).
FB announced in early March 2015 that it would commence the monitoring of ad relevance in line with its pricing model to lower the cost of catchy ads and penalize bad ads. Facebook Messenger has introduced a new peer-to-peer payment feature as well.
During the fourth quarter, FB’s revenue grew 53% year-over-year (or YoY) to $3.9 billion and its ad revenue was $3.6 billion. Mobile ad revenue accounted for 69% of total ad revenue. GAAP net income was up 34% YoY to $701 million or $0.25 per diluted share.
While Facebook uses minimal debt in its capital structure with a debt-to-equity (or DE) ratio of 0.0x, peer Twitter (TWTR) has a DE ratio of 0.4x.
In the next part of this series, we will discuss AQR Capital’s lowered position in Phillips 66 (PSX).