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No Signs of Weakness at Facebook, But Shares Still Too Pricey

Facebook remains one of highest-quality businesses in the Internet sector but investors should wait for a larger margin of safety before buying shares, writes Morningstar’s Rick Summer.

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 Facebook (FB) posted another impressive quarterly report across nearly all facets of the business, including user growth, engagement, overall revenue growth, and success with its mobile advertising products. We fail to notice any particular weakness at this time, and are likely to increase our fair value estimate to $65 after revising our financial model. We also reiterate our wide moat rating, and consider Facebook one of the highest-quality businesses in the Internet sector.

Total company revenue grew 49% to $3.85 billion, as the advertising segment approached nearly $3.6 billion in revenue (up 53%). Facebook is truly a dominant mobile platform (for example, U.S. users spend more than 20% of their time on Facebook and Instagram applications), as mobile ad revenue reached 69% of total ad revenue, up from 53% in 2014. We estimate that Facebook had nearly 8% of the global digital ad market in 2014, and we expect that percentage to go up because of its reach and unique customer data.

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