No Signs of Weakness at Facebook, But Shares Still Too Pricey

Total company revenue grew 49% to $3.85 billion, as the advertising segment approached nearly $3.6 billion in revenue (up 53%). Facebook is truly a dominant mobile platform (for example, U.S. users spend more than 20% of their time on Facebook and Instagram applications), as mobile ad revenue reached 69% of total ad revenue, up from 53% in 2014. We estimate that Facebook had nearly 8% of the global digital ad market in 2014, and we expect that percentage to go up because of its reach and unique customer data.

On the profitability front, management expects expenses to grow more quickly than revenue in 2015, as the company invests in advertising technology, the messaging platforms Facebook Messenger and WhatsApp, and longer-term initiatives such as virtual reality (through its Oculus acquisition) and Internet connectivity (through a collaborative effort called Internet.org). The firm finished 2014 with a 40% full-year GAAP operating margin, but we anticipate a decline in 2015 (to the low-30s) before expanding again in 2016. Still, we believe that Facebook’s business model is unique and likely to be one of the most profitable on a normalized basis. We applaud the firm’s patience and long-term vision, although we acknowledge there are few metrics that can justify these investments for investors at this time. For this reason, we encourage investors to wait for an appropriate margin of safety and stay on the sidelines at this time.

Engagement and user growth was also strong, as 890 million people accessed Facebook, an increase of 18% versus 2014. Nearly two thirds of users access Facebook on a daily basis (75% in the U.S. and Canada), and daily user growth continues to outpace monthly user growth. These metrics reinforce our thesis that users are unlikely to divorce themselves from the social platform. Ad pricing has also proven strong, as ad revenue per user grew 35% versus 2014. As the firm continues to improve measurement tools within their advertising technology platform (and thereby create more transparency for advertiser ROI), we would expect ad revenue per user to continue to improve for the foreseeable future.

Morningstar Premium Members gain exclusive access to our full Facebook Analyst Report, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.