Impressive Results for Facebook Despite Scandal
The better than expected results support our view that the wide-moat firm can regain user trust.
Facebook (FB) reported better-than-expected first-quarter top- and bottom-line results, while posting growth in daily and monthly active users, which we think is indicative that the firm’s all-important network effect (a key source of its wide economic moat) is intact. We think Facebook’s first-quarter results provide some support for our view that the firm can regain user trust and weather the Cambridge Analytica and overall data privacy issues it is currently facing. We believe Facebook is likely to endure the short-term impact of the scandal, and we do not expect a significant long-term headwind to Facebook's platform, operations, or wide moat rating. Based on Facebook’s first-quarter results and management guidance, we slightly adjusted our revenue growth assumption upward, but this did not move the needle on our $198 per share fair value estimate for the firm. While shares of this high-uncertainty name are up 7% in afterhours trading, we still see about 17% upside in Facebook’s shares and believe investors have been presented with an attractive margin of safety.
First-quarter total revenue of nearly $12 billion was up 49% year over year. Facebook’s ad revenue rose 50% over last year to $11.8 billion, driven by 13% year-over-year growth in monthly average users, accompanied by a 31% increase in average revenue per user, or ARPU. Regarding the bottom line, Facebook reported second-quarter operating margin of 45.5%, up over 400 basis points year over year, due to revenue growth outpacing the increase in operating expenses. Facebook now expects year-over-year operating expense growth between 50% and 60%, which is in line with our prior projection and higher than our estimate of 37% revenue growth. This increase in expenses is mainly due to growth of the firm’s continuing investments in ensuring quality content and protecting user data, in addition to acquisition of more video content.
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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.
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