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Facebook: One of the Best Businesses in the Internet Sector

Facebook's reign as a dominant mobile-advertising platform was evident again in the firm’s quarterly results, but this strong performance is already priced in to shares, writes Morningstar’s Rick Summer.

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 Facebook (FB) posted solid third-quarter results across all key performance metrics: revenue growth, user growth, engagement, and monetization. Additionally, the company broadly opened up Instagram ad inventory to all marketers during the quarter, contributing to Facebook's reign as a dominant mobile advertising platform. We reiterate our wide moat rating and consider Facebook one of the highest-quality businesses in the Internet sector. Although we anticipate a modest increase to our fair value estimate, we consider the shares fairly valued and would not recommend investment at this time.

Revenue grew 41% versus the year-ago quarter (51% in constant currency) to $4.5 billion, in line with our internal estimate, driven by advertising revenue, which grew 45%. The strong performance can be attributed to yet another quarter of strong user growth (17% growth in daily active users), increasing revenue per user (24% year over year), with notable monetization improvements in the United States and Canada. Operating margins declined to 32% from 44%, but we had already factored in increased research and development expenses 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.

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