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Facebook: One of the Best Businesses in the Internet Sector

Facebook's reign as a dominant mobile-advertising platform was evident again in the firm’s quarterly results, but this strong performance is already priced in to shares, writes Morningstar’s Rick Summer.

Revenue grew 41% versus the year-ago quarter (51% in constant currency) to $4.5 billion, in line with our internal estimate, driven by advertising revenue, which grew 45%. The strong performance can be attributed to yet another quarter of strong user growth (17% growth in daily active users), increasing revenue per user (24% year over year), with notable monetization improvements in the United States and Canada. Operating margins declined to 32% from 44%, but we had already factored in increased research and development expenses based on management guidance. We continue to model long-term GAAP operating margins in the mid-40s as the company’s rapid revenue growth outpaces expense growth again in 2016.

Mobile advertising continues to represent a strong point for the firm. Mobile ad revenue grew an impressive 71% from 2014, accounting for 78% of all advertising revenue. The company has made great strides since its late entrance to the mobile arena, with Facebook and Instagram accounting for more than 20% of all time spent on mobile apps in the U.S. As Facebook still has not allowed advertising on its second-most trafficked product, WhatsApp (which now has 900 million monthly users), mobile advertising will be the primary engine of growth for the social network.

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The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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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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