Neither Users Nor Investors Should Be Suffering From Facebook Fatigue
We’re raising our fair value estimate for Facebook after a strong quarter, but investors should wait for a more attractive price before investing.
Facebook (FB) continued to exploit its position as the highest-trafficked mobile application while benefiting from the shift in advertiser demand from offline to digital during the second quarter. We will make some minor adjustments to our financial model and increase our fair value estimate to $85, but we would not recommend the shares unless they were to trade below our fair value estimate. We are sticking with our wide moat rating.
User growth metrics continue to show resilience, as overall monthly users grew 13% versus the prior year to 1.49 billion, while daily users grew to 17% to 968 million. Mobile daily users grew even faster, posting a 29% rate and reaching 844 million users. In our view, Facebook's network effects and value proposition continue to support the largest global social network. During the quarter, users spent more than 46 minutes per day on three of Facebook's main applications: Facebook, Messenger, and Instagram.
Overall company revenue grew 43% to $4 billion, with advertising constituting 95% of the total ($3.8 billion). Revenue growth was driven by user growth and strong ad pricing. We believe the company is doing an effective job helping advertisers measure return on investment and deliver targeted campaigns, as average ad prices grew an impressive 220%. Management specifically pointed to a redesign of the ad formats on the right rail (outside the core newsfeed) as a primary contributor to this price increase, but an increase mix toward mobile (76% of the total ad bucket) contributed as well.
During the quarter, operating margins declined to 31% from 48%, but we have anticipated greater levels of operating expenses (particularly in research and development) based on management guidance. We continue to model long-term GAAP operating margins in the mid-40s as the company's rapid revenue growth outpaces expense growth again in 2016.
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Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.