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Stock Analyst Update

Facebook’s Strong Q1 Encouraging; COVID-19 Risks Remain

We now recommend a wider margin of safety before allocating capital to this wide-moat name.

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Facebook (FB) posted first quarter revenue and EBIT ahead of our projections and the FactSet consensus as demand for direct-response ads held up well in March. While the firm did not provide revenue guidance for the year, it does expect a decline in margins as it will continue to invest in new products. We still expect a decline in total revenue for the full year as the economic downturn will likely continue to reduce overall ad spending, including online. In addition, unlike Alphabet, Facebook has not diversified its revenue and cannot reduce the impact of COVID-19 on its top line. However, we were pleased with growth in user count and engagement, which could strengthen the firm’s network effect moat source. The stock has jumped 33% since its year-to-date low in mid-March, and is up another 10% in after-hours, approaching our $215 fair value estimate. We now recommend a wider margin of safety before allocating capital to this wide-moat name.

Total first quarter revenue of $17.7 billion was up 18% from last year, as Facebook had a very strong start to the quarter. However, demand for ads began to decline in March, which also resulted in lower ad prices. Verticals with the biggest decline in ad purchase included travel and automobile, while ad buying within gaming, technology, and e-commerce were not impacted as much. Similar to its peers (YouTube and Snapchat), Facebook benefited from stronger demand for direct response ads, which more than offset a decline in broad-based or brand ads.

Facebook did increase its ad supply as more users spent more time at home and online due to the coronavirus pandemic. The number of ads sold increased 39% while prices that advertisers were willing to pay declined 16%.

 

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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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