Analysts Upgrade Facebook as Revenues Grow 40%

Facebook has outperformed revenue estimates for the three months to the end of June - and users have increased significantly too. Morningstar equity analysts give their verdict

Rick Summer, CFA, CPA 30 July, 2015 | 3:37PM
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Facebook (FB) continued to exploit its position as the highest-trafficked mobile application while benefiting from the shift in advertiser demand from offline to digital during the second quarter. We will make some minor adjustments to our financial model and increase our fair value estimate to $85, but we think the shares do not look attractive at their current price. We are sticking with our wide moat rating.

Daily users grew to 17% to 968 million

User growth metrics continue to show resilience, as overall monthly users grew 13% versus the prior year to 1.49 billion, while daily users grew to 17% to 968 million. Mobile daily users grew even faster, posting a 29% rate and reaching 844 million users. In our view, Facebook's network effects and value proposition continue to support the largest global social network. During the quarter, users spent more than 46 minutes per day on three of Facebook's main applications: Facebook, Messenger, and Instagram.

Overall company revenue grew 43% to $4 billion, with advertising constituting 95% of the total, $3.8 billion. Revenue growth was driven by user growth and strong ad pricing. We believe the company is doing an effective job helping advertisers measure return on investment and deliver targeted campaigns, as average ad prices grew an impressive 220%.

Management specifically pointed to a redesign of the ad formats on the right rail as a primary contributor to this price increase, but an increase mix toward mobile, which makes up 76% of the total ad bucket, contributed as well.

During the quarter, operating margins declined to 31% from 48%, but we have anticipated greater levels of operating expenses, particularly in research and development, based on management guidance. We continue to model long-term GAAP operating margins in the mid-40s as the company's rapid revenue growth outpaces expense growth again in 2016.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Meta Platforms Inc Class A501.70 USD0.44Rating

About Author

Rick Summer, CFA, CPA  Rick Summer, CFA, CPA, is a senior stock analyst with Morningstar.

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