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Facebook Pleasantly Surprises Us, Shares Fairly Valued

Ad revenue growth and increasing engagement have led us to increase our fair value estimate for this wide-moat company, notes Morningstar's Rick Summer.


 Facebook's (FB) ad revenue growth and increasing engagement continue to surprise us, particularly as the Internet behemoth takes slow and calculated steps in launching advertising on other platforms such as Instagram, and WhatsApp. We have underappreciated the near-term growth potential, and we are revising our fair value estimate to account for more robust near term revenue growth. Expense growth continues to outpace revenue growth (as management has guided), but some products remain in the incubation stage (such as WhatsApp and Oculus), while others (Instagram) have only begun to tap their revenue potential. We reiterate our wide economic moat rating, and consider the shares fairly valued at this time. 

Revenue grew 42%, paced by advertising revenue, which grew 46% (55% on a constant currency basis) to $3.3 billion, ahead of our prior forecast for 2015 growth. This outperformance is primarily driven by continued growth in engagement (as measured by a percentage of monthly users accessing Facebook every day), while total users and revenue per user continue to grow. Ad revenue per user grew 29% versus 2014, while mobile revenue per user grew 46%. Total DAUs (daily active users) grew 17%, to 936 million, while engagement grew across every reported geography. Clearly, the risk of "Facebook fatigue" is not materializing today. During the quarter, 65% of users accessed Facebook every day, versus 63% in 2014.

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