Facebook Not a Buying Opportunity Today
We have confidence in the firm’s future, but investors should wait for a larger margin of safety in the wide-moat and high uncertainty name before jumping in.
Facebook (FB) reported slightly mixed second-quarter results with revenue in line with our internal forecast but below consensus. The firm did beat expectations on the bottom line. However, Facebook's guidance of margins trending to the mid-30s during the next couple of years as the company will be investing further in innovation, content creation, and data protection, was disappointing.
Total revenue growth was hampered by slower growth in monthly and daily active users due to the implementation of GDPR in Europe, partially offset by higher revenue generated per user. While margins remained at impressive levels, they did narrow year over year, as we had expected and noted in our previous reports. In light of the soft profitability guidance, we are lowering our fair value estimate for Facebook by 6% to $186.
We remain confident that wide-moat Facebook will successfully roll-out new products for users and advertisers and the firm can continue to more effectively monetize its users as the company begins to offer more premium video content not only on Facebook Watch but also on Instagram's IGTV.
Plus, we believe the firm will realize return on its investments in content quality management and data security in 2020 and beyond, resulting in longer-term margin expansion. With the stock down about 20% after hours, we now view shares as slightly undervalued when compared with our new $186 fair value estimate. We recommend waiting for a wider margin of safety, likely in the $150-$160 range, before investing in this wide-moat and high uncertainty name.
Total revenue came in at $13.2 billion, up 42% year over year. Revenue from advertising remained strong, growing 42% from the prior year to $13 billion. While demand for the firm's ad loads continued to grow, as indicated by higher ad prices and ads sold, the slowdown in user growth represents a bump in the road for Facebook revenue growth.
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Ali Mogharabi does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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