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Stock Analyst Update

Facebook’s Results Affirm Leadership

With more users and user engagement, Facebook continues to not only strengthen its network, but also possibly the value of its intangible assets stemming from user data.

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Wide-moat  Facebook (FB) started 2017 on a positive note with first-quarter revenue and operating income coming in ahead of expectations. While we are beginning to see deceleration in ad revenue growth, Facebook’s growing monthly average user, or MAUs, continue to indicate the strengthening of Facebook’s network effect, which reaffirms the firm’s leadership in the social networking and online ad markets. Although the first-quarter operating margin exceeded expectations, management reiterated that the firm’s expense growth is likely to outpace revenue growth this year. We made only minor adjustments to our estimates and are maintaining our $135 fair value estimate for Facebook. We continue to recommend a wider margin of safety before investing in the name.

Growth in Facebook’s MAUs and daily average users, or DAUs, continued to attract advertising dollars and generated ad revenue of $7.9 billion during the quarter, up 51% from the prior year. While Facebook is lowering ad inventory on its own properties later this year, for the time being, demand has remained strong, which has pushed up ad prices, as indicated by the 28% year-over-year increase in average revenue per user. In addition, the firm has successfully added Snapchat-like features, such as Stories, to Instagram, driving the app’s users and user monetization higher. Overall, with more users and user engagement, Facebook continues to not only strengthen its network, but also possibly the value of its intangible assets stemming from user data.

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