Facebook still a 'like' despite mixed result, says Morningstar
Declining growth in user numbers for the third-quarter fails to dent Morningstar's outlook for Facebook, as its financial performance surpassed expectations despite a top-line miss.
Declining growth in user numbers for the third-quarter fails to dent Morningstar's outlook for Facebook, as its financial performance surpassed expectations despite a top-line miss.
The social media giant reported US$13.7 billion in total revenue, which represented 33 per cent year-on-year growth. Ad revenue came in at US$13.5 billion, up nearly 34 per cent from last year. As expected, slowdown in user growth drove deceleration in overall ad revenue growth.
This "narrow miss on revenue" was mainly due to a declining user base in Europe, says Morningstar US equity analyst Ali Mogharabi – who largely attributes this to tightened privacy provisions via the General Data Protection Regulations.
Importantly, Facebook's network effect, a key underpinning of Morningstar's wide-moat rating for the company, remains intact.
"The firm's total daily and monthly user counts still beat our expectations. In our view, no decline in Facebook's US users was reassuring," says Mogharabi.
In Morningstar's research methodology, network effect refers to the increasing value of a company's service for both new and existing users, as more people use the service.
Facebook's wide moat rating is based on its massive user base, with some 2.27 billion monthly active users as of September this year. This compares to 2.07 billion users a year earlier.
Advertising revenue held up despite concerns around data security and "fake" content
However, US and Canada daily averages have been flat at 185 million since the first quarter of 2018, and daily active users in Europe declined to 278 million, down from 279 million in the second quarter and 282 million in the first quarter.
Regardless, Mogharabi believes Facebook's strong network effect moat source will enable it to attract users to its Stories (whether on Facebook or Instagram), Facebook Watch, and Instagram and its IGTV digital television platform.
"As the firm maintains more users on its overall platform, it is more likely that user engagement will stay at the current 66 per cent level, which has been the case for the last 11 quarters," he says.
Mogharabi is also encouraged by the ongoing strength of Facebook's advertising business, despite the data and content issues that plagued it this year.
"More importantly, albeit data and content issues that have surrounded the firm this year, advertisers continue to spend on Facebook as ad loads and ad prices both increased and further drove impressive double-digit growth in revenue generated per user," he says.
Facebook CEO Mark Zuckerberg's plans to further monetise newer acquisitions, including Instagram and Stories, was also well received by Mogharabi.
"We remain confident Facebook can effectively monetise its new products to partially offset deceleration in News Feed ad revenue growth during the next 12-24 months.
"While ad prices on Stories and Instagram currently trail those of News Feed, with further user adoption, demand for the ads will grow, possibly driving prices higher," Mogharabi says.
Morningstar maintains its US$186 fair value estimate for Facebook, which at last closing price of US$151.79, sees it trading at a 21 per cent discount.
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Glenn Freeman is senior editor at Morningstar Australia.
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