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Facebook, Amazon surpass expectations in Q4 earnings

Glenn Freeman with AAP  |  01 Feb 2019Text size  Decrease  Increase  |  
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Internet behemoths Facebook and Amazon have beaten market expectations in delivering solid earnings results for the fourth quarter of fiscal 2018.

Morningstar has reaffirmed its moat rating for the social media firm and welcomed the "impressive" result. Equity analyst Ali Mogharabi singled out the social media firm's 30 per cent year-on-year uptick in ad revenue, on the back of growth in user numbers and engagement.

"In our view, Facebook's network effect moat source remains intact, as demonstrated by further improvement in user monetisation during the quarter.

"We remain convinced that further growth in Instagram, IGTV, and stories users will continue to attract advertisers to Facebook's platform," he says.


Solid advertising revenue growth underpins Morningstar's positive outlook for Facebook

Mogharabi says he was impressed with the return to year-over-year growth of daily average user numbers in US and Europe – the two highest advertising markets globally.
He expects monetisation of users to continue growing over the next five years, though at a slower rate than previously.

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"Overall, we remain confident that with a strong network effect moat source, which has resulted in more than 2.3 billion users, Facebook will continue to attract advertisers to its platform," Mogharabi says.

He downplayed the affect of the ongoing data security and privacy issues, noting management's further investments in product integration and security.

Combined with the roll-out of new social network products and features, these are expected to help Facebook maintain and grow user numbers and extract further value from them.

Online retailer Amazon also topped market expectations in delivering a 20 per cent boost in year-on-year revenue for the quarter, coming in at US$72.4 billion, and record net profit of US$3 billion. It was Amazon's fifth straight quarter of reporting more than US$1 billion in profit.

The consensus forecast was for revenue of US$71.8 billion.

Morningstar regards Amazon as holding a wide moat, which it attributes to the company's long-term ability to deliver returns that outstrip its cost of capital.

"We believe Amazon's brand has come to represent low prices, a wide selection, convenience, and superior customer service – a rare combination among retailers," Morningstar equity analyst R. J. Hottovy said last October.

"Its operational efficiency, network effect, and a brand intangible asset built on customer service provide it with sustainable competitive advantages that few, if any, traditional retailers can match."

Amazon founder Jeff Bezos highlighted the company's Alexa voice assistant and Echo Dot – its best seller across all products during the Christmas season.

In November, Amazon announced its "HQ2" plans for a second base of operations in North America -- after a 14-month public contest in which 200 cities vied to grab the brass ring dangled by the ecommerce giant - would be split between Long Island City, in the New York City borough of Queens, and the Crystal City neighbourhood in Arlington just south of Washington, D.C.

Amazon's picks generated controversy, as some critics and politicians criticised the nearly US$2.1 billion in tax incentives awarded to the company.

. Glenn Freeman is senior editor, Morningstar Australia.

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