Facebook (FB) reported impressive first-quarter numbers as both the top and bottom lines (excluding a fine possibly imposed by the Federal Trade Commission) beat our internal projections and consensus. Advertising revenue remained strong in all regions, driven by user growth and number of ads sold. Demand for ads within stories continued to increase, although those ads were sold at lower prices. We do not expect significant ad price recovery as additional restrictions on data usage may reduce the effectiveness. However, we expect the higher inventory sold to offset the impact of lower prices on overall ad revenue. Plus, growth in Facebook’s audience should continue to attract advertisers. In our view, Facebook’s user and ad revenue growth continues to display the firm’s network effect moat source and support our wide moat rating.
Management did not change its 2019 outlook. After adjusting our projections slightly higher given the strong first quarter, we upped our fair value estimate by 5% to $200 per share. The stock has climbed 39% year to date and is now trading in 3-star territory. We recommend waiting for a pullback before investing in this wide-moat name.
Total revenue of $15.1 billion was up 26% year over year. Revenue from advertising remained strong, also growing 26% from the prior year to $15 billion as the company sold 32% more ads. The increase in ads sold was accompanied by a 4% decline in prices as more of the new ads sold were cheaper stories ads. We think that over time, as ad measurement for stories ads improves, demonstrating attractive returns on investment, advertisers could pay slightly more. An 8% growth in overall monthly active users, with 1% growth in U.S. and Canada, 2% in Europe, and 12% in Asia, also contributed to revenue growth. As changes in daily average users were similar to MAUs in the quarter, overall user engagement stayed around 66%, which we view as positive.
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Ali Mogharabi does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.