Facebook's Dominance Continues, but Shares Overvalued
Facebook has a bright future, but given high valuations investors are better off looking elsewhere for investment opportunities today, says Morningstar’s Rick Summer.
Market Update
Facebook (FB) reported stellar fourth-quarter results that were ahead of our estimates for profitability, and well ahead of consensus estimates for both revenue and earnings per share. We're increasing our fair value estimate to $45 per share, as we believe we have underestimated the near-term operating leverage in the business.
Contrary to media reports about users fleeing Facebook, growth in daily active users (22%) outpaced growth in monthly active users (16%), supporting our wide economic moat rating. However, we're cautious about the stock today, and believe there is downside valuation risk at today’s prices. We would encourage investors to look elsewhere for investment opportunities.
Mobile advertising revenue led Facebook’s stellar results, reaching $1.2 billion and exceeding desktop revenue ($1.1 billion) for the first time in the company’s history. Facebook’s mobile ad products continue to perform quite well, as mobile ad revenue per user grew 30% versus the third quarter, to $1.31, or 12% more than comparable desktop ad revenue/user metric. We continue to be impressed with Facebook’s mobile applications, and believe that the user experience and engagement will continue support the company’s dominance as a mobile advertising platform.
The company’s GAAP operating margins reached 44%, bringing annual operating margins to 36%, which is approximately 300 basis points above our previous forecast for 2013. Although we note the fourth quarter is seasonally strong and likely overstates the long-term potential for operating leverage, we are revising our near and mid-term operating margin forecast to 39%.
Our assumptions reflect our optimism and long-term belief in Facebook's business, as we expect revenue to reach $20 billion in 2017. Ultimately, we believe the company’s operating leverage will be counterbalanced by higher costs made to new customers and partners as it extends its advertising reach beyond Facebook-owned properties.
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