To put it mildly, there hasn’t been a ton of good news out of China for U.S. investors lately.
One doesn’t have to look hard for examples of companies hit hard by weaknesses in China: Apple’s (AAPL – Get Report) troublesome fourth quarter, which saw dramatically lower revenue than expected because of slow China sales is among the leading examples. More recently, Nvidia (NVDA – Get Report) issued a warning that “Deteriorating macroeconomic conditions, particularly in China” resulted in depressed revenue last quarter. Machinery manufacturer Caterpillar (CAT – Get Report) included similar language in its disappointing January earnings report.
But there’s one surprising example of a company seeing some success in China, and it’s one that doesn’t even operate there: Facebook (FB – Get Report) , which is banned in the country.
According to FactSet, China is Facebook’s fifth-largest market by revenue, behind the U.S., Russia, Turkey and Canada. In a recent research note, Pivotal’s Brian Wieser estimated that Facebook generated between $5 billion and $7 billion from Chinese advertisers, which translates into around 10% of Facebook’s total revenue of $55 billion for fiscal 2018.
Considering Chinese users can’t access Facebook, and the company has no presence there, how exactly does that work?
In its 10-K filing for fiscal 2018, Facebook noted that it’s gained meaningful revenue “from a limited number of resellers representing advertisers based in China.”
A report this week detailed how that resellers’ market works. In Shenzen, Facebook worked with a local organization called Meet Social to establish a small, unofficial China office that acts as a brokerage of sorts for Facebook ads according to the New York Times. Charles Shen, chief executive of Meet Social, said that its software places 20,000 Chinese ads per day on Facebook, and that his company expects to do $1 billion to $2 billion in sales this year on Facebook and Instagram.
It’s unclear if, and how much, this resellers’ market is expected to grow in China — or how durable that source of revenue will be for Facebook.
Wieser added in the research note that the China revenue may not be immune to economic downturns, noting that “spending trends might be impacted by economic trends in China or changes in postal regulations.” And in the 10-K filing, Facebook also offers a general warning that “if we fail to deploy, manage, or oversee our international operations successfully, our business may suffer.”
Facebook investors will likely take what they can get. Boosted by a stronger-than-expected fourth quarter, its stock is up 25% so far this year.
Facebook rose 95 cents, or 0.6%, to end at $167.33 Friday.
Facebook and Apple are holdings in Jim Cramer’s Action Alerts PLUS member club.