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Stock Analyst Update

Facebook Beats Expectations; Raising FVE to $265

Due to the strong second-quarter numbers, we have increased our projections for Facebook for this year and 2021 which resulted in a $265 fair value estimate, up from $245.

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Facebook (FB) reported second-quarter results above our projections and the FactSet consensus estimates as the firm continued to attract ad dollars even during the economic downturn. Users and their engagement on Facebook’s platforms continued to grow, displaying the resilience of the firm’s network effect moat source. Facebook remains the most attractive platform for what has become the most highly demanded ad type by advertisers, direct response, which has minimized the impact of lower brand ad spending. Regarding guidance, the firm does not expect revenue growth to accelerate in the third quarter as the end of various lockdowns and quarantines in different markets may lower user growth and engagement. Also, uncertainty surrounding the macroenvironment persists, and limitations on data usage could be imposed on the firm and its peers by lawmakers and companies such as Apple. 

Due to the strong second-quarter numbers, we have increased our projections for this year and 2021 which resulted in a $265 fair value estimate, up from $245. We recommend waiting for a wider margin of safety before investing in this wide-moat and high uncertainty name.

Total second-quarter revenue came in at $18.7 billion, up 11% from last year. With over 2.7 billion monthly active users (up 12% year over year) small and medium businesses, or SMBs, continued to allocate their ad dollars to the platform, boosting ad revenue 10% to $18.3 billion. As we mentioned in our July 8 note, the continuing shift toward e-commerce, which the pandemic has accelerated, has also pushed advertisers to spend more on these bottom-of-the-funnel campaigns. Impressively, such spending during the economic downturn held Facebook’s average revenue per user steady at $7.05. The firm generated double-digit ad revenue growth in North America, Europe, and Asia, partially offset by declines in the other regions.

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Ali Mogharabi does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.