Facebook Reports Impressive Q1; Raising FVE to $390
Given strong demand from advertisers, which we think will be sustainable as the economy recovers, we have increased our projections.
Facebook (FB) posted impressive first-quarter results with the top and bottom lines beating our expectations and the FactSet consensus estimates. Economic recovery is driving higher ad spending, mostly digital, with behemoths Facebook and Google continuing to benefit. Ad prices again increased even as inventory continues to grow, indicating stronger advertising demand for Facebook and Instagram. Revenue growth, along with a lower bad-debt allowance versus last year, expanded margins during the quarter. We expect an economic recovery will benefit small and medium-size businesses, the majority of which will likely prioritize digitization, sending ad dollars to Facebook and Google, which should fuel strong growth throughout 2021. Management guided second-quarter revenue above expectations and provided guidance on operating expenses that implies slight margin expansion this year based on our revenue growth assumptions.
Given strong demand from advertisers, which we think will be sustainable as the economy recovers, we have increased our projections, increasing our fair value estimate to $390 from $335. This wide-moat name remains attractive as it trades roughly 20% below our fair value estimate. The stock does face risks such as changes to Apple’s identifier for advertisers, data privacy and antitrust issues, along with possibly a 6%-10% negative impact from a possible increase in the federal statutory tax rate, along with higher rates on global intangible low-taxed income, and possibly the elimination of the foreign-derived intangible income deduction. Despite these risks, we remain confident in the firm’s ability to maintain its wide moat and strong growth.
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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.