Facebook Reports Impressive Q4; Raising FVE to $335
This wide-moat name has become attractive as it is now trading at a 19% discount to our fair value estimate.
Facebook’s (FB) fourth quarter results came in above our projections and the FactSet consensus estimates. Ongoing growth in e-commerce and direct response advertising, in addition to some signs of recovery in brand advertising drove strong revenue growth during the quarter, which also helped further expand margins. Management was again conservative regarding its outlook for this year, in our view. Given the tougher comps due to the firm’s solid performance in the second half of 2020, top-line growth may not be as impressive in the second half of this year. Facebook expects consumer demand to shift slightly more toward services (like travel) from products this year, which may be a headwind to revenue growth as Facebook advertising has lower exposure to service industries. Management also reiterated that regulations and changes to Apple’s identifier for advertisers could create headwinds. While the firm faces tougher ad revenue growth comps in the second half of this year, we expect most of that to be offset by stronger brand ad spending. In addition, we believe that during an economic recovery, not only will current businesses increase ad spending, but also new small businesses will likely turn to Facebook and Instagram for marketing. Plus, while Apple’s move may lower ad ROIs, we believe advertisers will have little choice but to use Facebook due to its large audience. Due to a slightly speedier turnaround in ad spending in late 2020, we lowered our average growth assumption for the next five years, but believe margins can be higher than we initially expected, which after taking into account the time value of money, results in a fair value estimate of $335 (from $306). This wide-moat name has become attractive as it is now trading at a 19% discount to our fair value estimate.
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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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