Facebook (FB 154.18, +7.96, +5.44%) is trading higher following mixed results.
With the stock 33% off its all-time high from three months ago, trading at ~20x
EPS, it seems like near-term headwinds the company is facing may have been
priced into the stock.
Facebook missed revenue estimates for the second quarter in a row. The company had exceeded top-line estimates thirteen quarters in a row before that.
Revenue growth is still robust at 33%, but growth is decelerating. The company is in the process of improving its advertising offerings for its most popular features, including private messaging, ephemeral stories and external video apps like IGTV and Facebook Watch. 100 bln messages are shared per day across Facebook services. Meanwhile, ephemeral stories are replacing permanent posts and Facebook wants to be a destination for longer form video consumption as well. So the company is competing for our attention and going head-to-head with Apple's iMessage and Alphabet's YouTube. Instagram is seemingly on track to render Snapchat somewhat irrelevant.
A key concern is that expense growth (up 53%) is outpacing revenue growth as the company invests in much-needed security on its platform. As a result, EPS grew only 11%, but analysts were actually expecting EPS to fall 9% yr/yr.
Another concern is reduced engagement as the core Facebook platform has saturated developed markets. Facebook narrowly missed monthly active user (MAU) and daily active users (DAU) estimates. Daily active users were flat sequentially in the US & Canada and fell slightly in Europe. Still, overall user growth is staggering. DAUs grew 9% to 1.49 bln while MAUs grew 10% to 2.27 bln.
On the call, management foretasted fourth quarter revenue largely in-line with its prior forecast (roughly mid-20% growth). Facebook reduced expense growth guidance for the year to 50-55% from 50-60%. The company forecasted expenses growing 40-50% next year. While that was higher than expected, the company also said margin contraction would likely peak next year.
Earnings estimates for 2019 have fallen by ~7%, resulting in expectations for very modest EPS growth next year. Investors seem to be looking past that.
While Facebook has lost some of its luster, Instagram has made up for it, becoming the most popular social media service in the US. What's more, WhatsApp has essentially replaced SMS in most of the world. At the same time, the Messenger app has higher daily messaging volume than SMS did at its peak. So it seems that investors are looking past the near-term headwinds given the company's dominant market position in messaging and social media.
Despite a $440 bln valuation, Facebook has quickly morphed into a value stock, but the long-term growth prospects remain very encouraging.
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