Wide-moat Facebook (FB) reported mixed third-quarter results and provided fourth-quarter revenue guidance below the FactSet consensus estimates. As expected, the firm faced issues related to Apple’s changes to iOS. On the positive side, the firm’s user base displayed continued growth and improving user engagement, supporting its network effect moat source. With a very large user base from which to generate first-party data, we expect Facebook to develop solutions to address Apple’s changes and questions surrounding the effectiveness of direct response ads. We also think Facebook’s user base creates long-run monetization opportunities on the augmented and virtual reality fronts which will not only diversify the firm’s revenue but may also slightly lessen headline grabbing regulatory and social pressures.
After adjusting our model slightly, we reduced our Facebook fair value estimate by less than 1% to $404. We continue to view this 4-star name as the most attractive social media stock under our coverage. The firm also increased its share buyback authorization, which we think could provide support for the stock at current levels.
Facebook’s total third-quarter revenue of $29 billion was up 35% from last year driven by year-over-year increases in users (6%) and monetization (27%). Despite Apple’s iOS changes, advertising revenue increased 33% to $28.3 billion. Other revenue grew 195% to $734 million mainly due to sales of Quest 2. While negative headlines have pressured Facebook’s stock price, user engagement increased sequentially and was down only 16 basis points from last year when more stringent lockdowns were still in place. Ad inventory increased 9% year over year, accommodated by 22% higher ad prices, which displays strong demand.
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