Facebook Tops Expectations, Again
We're boosting our fair value estimate for the firm but see shares as fully valued today.
We continue to be amazed at Facebook’s (FB) ability to surpass expectations consistently as the firm yet again beat on the top- and bottom-lines during the third quarter of 2017. Facebook’s network effect moat source was on display as double-digit year-over-year growth in users and revenue per user continued for the firm. Management expects revenue growth to decelerate in the fourth quarter at a slower pace than we had initially anticipated. On the downside, in 2018, the firm believes its continuing investment in improving the security and transparency of its platform, along with providing more video content and overall product innovation for its users, are likely to significantly increase operating expenses from 2017, which will result in a lower operating margin. Nonetheless, based on Facebook’s strong third quarter performance, we are forecasting higher revenue and expect margins to recover to the 40% range and above starting in 2019. With those adjustments, we now value wide-moat Facebook at $163 per share, up from $155. We continue to view Facebook shares as fairly valued.
Second-quarter total revenue of $10.3 billion was up 47% year over year. Facebook’s ad revenue rose 49% over last year to $10.1 billion, driven by 16% year-over-year growth in monthly average users, or MAUs, accompanied by a 26% increase in average revenue per user, or ARPU. Regarding the bottom line, Facebook reported third-quarter operating margin of 49.6%, up by approximately 500 basis points year over year, due to slightly higher gross margin and lower growth in SG&A expenses. While the firm lowered its year-over-year operating expense growth expectation for 2017, it did note that in 2018, operating expenses are likely to increase by 45%-60% from 2017, as Facebook continues to invest in video content and higher R&D headcount. Plus, further investments in data centers around the world will push Facebook’s capital expenditure to $14-$15 billion in 2018, nearly double our estimate for 2017.
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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.