Facebook (FB) is up 8% at a nine-month high premarket after the company beat revenue estimates for the second straight quarter.
Excluding $3 bln the company set aside for its $3-5 bln estimate for an FTC settlement regarding its data privacy mistakes, earnings per share grew 12% to $1.89. Earnings were expected to fall 4% as the company invests in the safety and security of its social media platforms.
Revenue grew 26% to just over $15 bln. While that represents Facebook's slowest growth rate on record, investors are encouraged by the company's ability to navigate the shifts in its advertising business. What's more, revenue in its largest market, the US and Canada, grew 30% to $7.2 bln.
While shift toward ephemeral stories and private messages on Facebook's platforms continues to act as a revenue headwind, Facebook has been able to maintain a healthy growth rate in its advertising business by increasing ad load on Instagram and Instagram stories.
Advertising prices fell 4% while ad impressions (volume) grew 32%. Advertisements that follow ephemeral stories are lower priced, but these stories, by virtue of format, offer more room to increase ad load (supply) than do the Facebook and Instagram traditional news feeds.
Engagement on Instagram remains very high. Last quarter, the company said that there were 500 mln daily active users on Instagram Stories. That is more than Snapchat (SNAP) and Twitter (TWTR) combined.
Meanwhile, engagement on Facebook remains stable. Daily active users (DAU) on the core Facebook platform grew 8% yr/yr and 2.6% sequentially. DAUs in the US and Canada was flat sequentially.
The company estimates that more than 2.1 bln people now use its family of services -- Facebook, Instagram, WhatsApp, or Messenger -- every day on average, and around 2.7 bln people use one platform from that family of services each month. The world has roughly 7.7 bln people and 56% of them, or 4.3 bln people use the internet.
Facebook reaffirmed guidance for decelerating revenue growth this year, pointing to headwinds on the supply side (lower priced ads on stories) and the demand side as people have chosen to limit ad targeting abilities in the wake of data privacy scandals.
The company also lowered its expense guidance for the year, excluding the record-breaking $3 bln legal accrual for an FTC settlement. Expenses are now expected to grow 37-45%, down from 40-50% prior guidance. Mark Zuckerberg made it clear that investing aggressively in infrastructure and the safety and security of its platforms was still a top priority. The company tends to guide costs conservatively and walk them down as the year progresses.
Mark Zuckerberg also provided his thoughts on the need for global internet regulations.
Despite regulatory headwinds and the public relations mess that has come from its data privacy mishaps, Facebook remains the world's dominant social media company. The company still has a plethora of levers to pull to increase revenue over the long term. Meanwhile, earnings growth is expected to accelerate to 20% next year as expense growth (margin contraction) moderates.
At $200/share, the ~22x earnings multiple (based on FY20 estimates) remains attractive to investors given the company's dominant market position and long-term growth prospects.