Facebook Posts Strong Quarter But Cautious About 2021

Facebook FB reported better-than-expected third-quarter results but provided a cautionary outlook for 2021. The firm is concerned that demand for direct response ads may weaken a bit during a recovery after an unexpected spike during the coronavirus pandemic. Additionally, Facebook management reiterated that changes to Apple’s identifier for advertisers could create headwinds. However, we believe management is being overly cautious, as an economic expansion will likely be accompanied by the startup of small businesses, which will mainly use direct response advertising. In our view, the pandemic and resulting e-commerce growth has increased the stickiness of Facebook, as smaller businesses have become more dependent on the platform for advertising and various tools (such as Facebook Shop and Business Suite) that the firm provides to help with digital transformation.

An economic recovery should also prompt a rebound in demand among brand advertisers. Finally, while Apple’s move may lower ad ROIs, we believe advertisers will have little choice but to use the platform given its large audience. We increased our 2020 and 2021 revenue projections, increasing our fair value estimate to $306 (from $285). We view this wide-moat stock as fairly valued.

Facebook posted total revenue of $21.5 billion, up 22% year over year driven by growth in users and user monetization. The firm’s monthly active user count increased in all markets, reaching more than 2.7 billion users globally, up 12% from 2019. With similar growth in daily active users, overall engagement on the platform remained at about 66%. More users and more time spent on the platform continue to attract advertisers, mainly small and medium-size businesses, or SMBs, which further improved Facebook’s user monetization as average monthly revenue per user increased 9% from 2019 to $7.89. With more users and higher engagement, ad supply increased 35% from last year, with only a limited impact on prices, which declined 9%.

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