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Facebook Pleasantly Surprises Us, Shares Fairly Valued

Ad revenue growth and increasing engagement have led us to increase our fair value estimate for this wide-moat company, notes Morningstar's Rick Summer.

Revenue grew 42%, paced by advertising revenue, which grew 46% (55% on a constant currency basis) to $3.3 billion, ahead of our prior forecast for 2015 growth. This outperformance is primarily driven by continued growth in engagement (as measured by a percentage of monthly users accessing Facebook every day), while total users and revenue per user continue to grow. Ad revenue per user grew 29% versus 2014, while mobile revenue per user grew 46%. Total DAUs (daily active users) grew 17%, to 936 million, while engagement grew across every reported geography. Clearly, the risk of "Facebook fatigue" is not materializing today. During the quarter, 65% of users accessed Facebook every day, versus 63% in 2014.

On the profitability front, non-GAAP operating margins came in at 52% (26% GAAP), a decline of 450 basis points versus 2014. This discretionary investment in products such as Instagram, WhatsApp and Oculus Rift are investments that are clearly depressing current operating margins. We continue to forecast normalized operating margins at approximately 45%, as these investments either bear fruit or management chooses to ratchet down this level of spending.

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About the Author

Rick Summer

Strategist

Rick Summer, CFA, CPA, is a technology strategist for Morningstar, responsible for Internet and technology research. Before assuming his current position in 2014, he was a senior equity analyst. He joined Morningstar in 2005 as an equity analyst, covering software and Internet companies. He has operating experience in the wireless and software infrastructure industries and has worked as a private equity investor for UBS Global Asset Management.

Summer holds a bachelor’s degree in business administration from Emory University and a master’s degree in business administration from the University of Chicago Booth School of Business. He also holds the Chartered Financial Analyst® designation and is a Certified Public Accountant (CPA).

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