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Market Update

Slowdown in the Cards for Facebook?

We believe it is prudent for investors to consider decreasing their position in this overvalued stock.

Mentioned:

 Facebook's (FB) third-quarter results surpassed our short-term expectations, but given today's current valuation, we are cautious about the potential for a slowdown in growth as the company searches for new advertising products and other sources of revenue. Additionally, while management comments are not cause for alarm, we believe it is prudent for investors to consider decreasing their position in this overvalued stock. Our wide Morningstar Economic Moat Rating remains intact, and we are increasing our fair value estimate by $2 to $36 to account for our revised forecast.

Overall revenue grew 60% to $2.01 billion in the quarter, propelled by 66% growth in the advertising segment, which posted $1.8 billion in revenue. Revenue growth has accelerated in 2013, as new advertising products such as mobile News Feed and Facebook Exchange, or FBX,  are helping to support increases in ad revenue per user (advertising ARPU). In fact, advertising ARPU grew 38% versus 2012 to $1.53. We would expect the growth in advertising ARPU to periodically slow as the company launches new advertising products. In particular, we expect any dramatic slowdown in revenues would likely cause a sell-off in the stock, as we admittedly have very little visibility into short-term growth opportunity.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.