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Facebook still a 'like' despite mixed result, says Morningstar

Glenn Freeman  |  01 Nov 2018Text size  Decrease  Increase  |  
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Declining growth in user numbers for the third-quarter fails to dent Morningstar's outlook for Facebook, as its financial performance surpassed expectations despite a top-line miss.

The social media giant reported US$13.7 billion in total revenue, which represented 33 per cent year-on-year growth. Ad revenue came in at US$13.5 billion, up nearly 34 per cent from last year. As expected, slowdown in user growth drove deceleration in overall ad revenue growth.

This "narrow miss on revenue" was mainly due to a declining user base in Europe, says Morningstar US equity analyst Ali Mogharabi – who largely attributes this to tightened privacy provisions via the General Data Protection Regulations.

Importantly, Facebook's network effect, a key underpinning of Morningstar's wide-moat rating for the company, remains intact.

"The firm's total daily and monthly user counts still beat our expectations. In our view, no decline in Facebook's US users was reassuring," says Mogharabi.

In Morningstar's research methodology, network effect refers to the increasing value of a company's service for both new and existing users, as more people use the service.

Facebook's wide moat rating is based on its massive user base, with some 2.27 billion monthly active users as of September this year. This compares to 2.07 billion users a year earlier.

Facebook

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However, US and Canada daily averages have been flat at 185 million since the first quarter of 2018, and daily active users in Europe declined to 278 million, down from 279 million in the second quarter and 282 million in the first quarter.

Regardless, Mogharabi believes Facebook's strong network effect moat source will enable it to attract users to its Stories (whether on Facebook or Instagram), Facebook Watch, and Instagram and its IGTV digital television platform.

"As the firm maintains more users on its overall platform, it is more likely that user engagement will stay at the current 66 per cent level, which has been the case for the last 11 quarters," he says.

Mogharabi is also encouraged by the ongoing strength of Facebook's advertising business, despite the data and content issues that plagued it this year.

"More importantly, albeit data and content issues that have surrounded the firm this year, advertisers continue to spend on Facebook as ad loads and ad prices both increased and further drove impressive double-digit growth in revenue generated per user," he says.

Facebook CEO Mark Zuckerberg's plans to further monetise newer acquisitions, including Instagram and Stories, was also well received by Mogharabi.

"We remain confident Facebook can effectively monetise its new products to partially offset deceleration in News Feed ad revenue growth during the next 12-24 months.

"While ad prices on Stories and Instagram currently trail those of News Feed, with further user adoption, demand for the ads will grow, possibly driving prices higher," Mogharabi says.

Morningstar maintains its US$186 fair value estimate for Facebook, which at last closing price of US$151.79, sees it trading at a 21 per cent discount.

 

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Glenn Freeman is senior editor at Morningstar Australia.

© 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.

 

 

is senior editor for Morningstar Australia

© 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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