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Facebook shares plunge on growth fears

Morningstar.co.uk Editors  |  27 Jul 2018Text size  Decrease  Increase  |  
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Facebook Shares Plunge

Social media giant Facebook (FB) plunged 20 per cent at the open on Wall Street on Thursday as traders caught up with the company's disappointing second-quarter results. The shares had already slid in after-hours trading, wiping around $100 billion off the company's market value and the personal fortune of founder Mark Zuckerberg.

Wall Street analysts had estimated a rise in active users to 2.25 billion, but this fell short. A 50 per cent rise in costs year on year was driven by investment in data security after the Cambridge Analytica scandal. What really spooked investors was a warning by chief financial officer David Wehner that total revenue growth rates would fall in the second half.

Total revenue rose by over 40 per cent year on year in the second quarter, but this is expected to halve in subsequent quarters.

After the results, Morningstar equity analysts reduced their fair value estimate for Facebook shares to $186, above the current price of just below $180, saying that investors should wait for a better entry point before buying the shares. The current worries over revenue growth are a "bump in the road" before better times ahead in 2020, they say.

What analysts say

"Facebook reported slightly mixed second-quarter results with revenue in line with our internal forecast but below consensus," says Ali Mogharabi.

"The firm did beat expectations on the bottom line. However, Facebook's profit margin guidance was disappointing as the company will be investing further in innovation, content creation, and data protection. In light of the soft profitability guidance, we are lowering the fair value estimate for Facebook by 6 per cent to $186.

"Total revenue growth was hampered by slower growth in monthly and daily active users due to the implementation of GDPR in Europe, partially offset by higher revenue generated per user. While margins remained at impressive levels, they did narrow year over year, as we had expected and noted in our previous reports.

"We remain confident that Facebook will successfully roll out new products for users and advertisers and the firm can continue to more effectively monetise its users as the company begins to offer more premium video content not only on Facebook Watch but also on Instagram's IGTV. 

"Plus, we believe the firm will realise return on its investments in content quality management and data security in 2020 and beyond, resulting in longer-term margin expansion. With the stock down about 20 per cent after hours, we now view shares as slightly undervalued when compared with our new $186 fair value estimate. We recommend waiting for a wider margin of safety, likely in the $150-$160 range, before investing in this wide-moat and high uncertainty name.

"Total revenue came in at $13.2 billion, up 42 per cent year on year. Revenue from advertising remained strong, growing 42 per cent from the prior year to $13 billion. While demand for the firm's ad loads continued to grow, as indicated by higher ad prices and ads sold, the slowdown in user growth represents a bump in the road for Facebook revenue growth."

 

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James Gard is a Morningstar editor, based in London.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

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© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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