Facebook Profits Grow but Warns Slower Growth Ahead

While Facebook surpassed all expectations once again, the company noted that the growth we have seen recently may not continue in the fourth quarter

Morningstar Equity Analysts 4 November, 2016 | 9:25AM

Facebook’s (FB) third-quarter results came in ahead of expectations with strong user and ad revenue growth, and we think these results validate our wide moat rating on Facebook as it remains the market leader in the social-networking space and one of the leaders in the overall online ad market. We note that Facebook needs to continue to invest in innovation to further differentiate itself from competitors such as Snap Inc.

For this reason, management hinted at growth acceleration in operating expenses in 2017. In addition, as we have been expecting the last six months, the firm expects to see a deceleration in revenue growth in the upcoming fourth quarter and calendar 2017. We are maintaining our $127 fair value estimate for Facebook. Although the shares were down nearly 8% and below our fair value estimate in after-hours trading, we continue to recommend waiting for a wider margin of safety before investing in this name.

Total advertising revenue grew 59% year over year to $6.8 billion, driven by 16% and 17% growth in monthly average users and daily active users, respectively. Geographically, such growth in ad revenue was led by 64% year-over-year growth in the Asia region. Facebook’s mobile users increased by 20% from a year ago, driving mobile revenue higher to represent 84% of total ad revenue. The increase in mobile users and mobile revenue clearly demonstrate the continuing growth in demand for digital ads on mobile platforms from small and large businesses.

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