Following the social-networking firm's quarterly results and the challenges it faces during the next several quarters, investors could see an attractive entry point for the stock soon, says Morningstar's Rick Summer.
Facebook (FB) posted its first-quarter earnings report as a public company yesterday. For our purposes, results were solid, though we believe that near-term challenges are becoming more visible to investors given the meaningful decline in the stock price today. Overall, our investment thesis remains intact so we are keeping with our fair value estimate. Still, we would expect further near-term disappointment and would encourage investors to consider an even wider margin of safety before making an investment.
Facebook's revenue increased 12% sequentially and 32% versus 2011, as revenue decelerates yet again. We expect growth to continue to be lumpy as the company launches new ad products and advertisers continue to hone their measurement techniques for calculating their return on investment. Both of these challenges remain, we believe, and will continue to pressure the company over the next several quarters at a minimum. As a result, we would not be surprised to see further declines in the stock price.
For near-term revenue growth expectations, recent historical context provides a bit of perspective, in our view. From 2010 through 2011, the company reported lower sequential growth for three of those eight quarters. We expect continued lumpiness going forward, particularly as much of the Facebook advertising efforts center around campaigns (such as new product launches) versus recurring advertising spend.
While monthly active users grew 6% sequentially, daily active users basically kept pace at 5%, indicating that user engagement is reasonably stable. We believe engagement is important, as it reinforces habits and provides evidence of Facebook's moat, in our view. Furthermore, the massive audience and engagement provides Facebook and advertisers both time and data to tweak their advertising campaigns.
Overall, we believe that near-term challenges and continued engagement will provide investors with an attractive entry point for this Internet giant. Currently, we believe that investors should wait until the stock trades below $20, a level the stock has not seen to date. Given the near-term challenges, however, that day may come sooner rather than later.
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