We are increasing our fair value estimate of Facebook (FB) to $407 from $390. The firm reported better than expected second quarter top- and bottom-line results driven by user growth and growing monetization. Economic recovery continues to drive higher ad spending, a big chunk of which is allocated to Facebook and its properties. We are pleased with Facebook’s continuing enhancement of its platforms as it improves e-commerce functionality, increases video content, and introduces more audio content, which support the firm’s network effect moat source on the user and advertiser sides, increasing overall ad inventory. Facebook is also investing in innovation for the long-run, including Metaverse, which we view as the next stage of growth and development in virtual reality. While Metaverse is likely to require more interoperability between many platforms and may slowly erode Facebook’s walled garden, the firm’s current network effect moat source should maintain more users on the Facebook side of the Metaverse.
Management guided for significant deceleration in revenue growth during the second half of this year, which we had already modeled in. We have still slightly increased our projections given the strong second-quarter results. While the stock is down in after-hours trading, it remains in 3-star territory and fairly valued, in our view.
Total revenue of $29.1 billion was up 55.6% year over year due to higher ad prices and an increase in users. Facebook benefited from ongoing strong demand for direct response and the resurgence of brand advertising. Monthly active users increased 7% and 2% year over year and from last quarter, respectively, to nearly 2.9 billion. Engagement remained at around 66% as daily active users increased to 1.9 billion (also up 7% from last year and 2% sequentially). Given last year’s tougher comp, ad inventory inched up only 6%, but strong demand from advertisers drove prices 47% higher from last year.
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