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Facebook - FTC fine takes the edge off strong results

George Salmon | 25 April 2019 | A A A
Facebook - FTC fine takes the edge off strong results

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Meta Platforms Inc Com USD0.000006

Sell: 167.80 | Buy: 167.84 | Change -6.87 (-3.93%)
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Facebook's first quarter revenue rose 26% year on year to $15.1bn, while earnings per share, excluding a $3bn legal expense, were $1.89, up 11.8%. Both figures are ahead of prior expectations.

The shares rose 7.2% in pre-market trading.

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Our view

The recipe for Facebook's success has been a simple one.

Take two billion monthly users, add a huge amount of data on those users and... voila! A perfect canvas for advertisers.

Revenue has compounded up at an average rate of close to 50% in the last five years, and a comparatively low cost base means profits have come along for the ride.

However, change is in the air.

Oodles of data give it great power, but that brings great responsibility. Spending, including on data security and combatting fake news, is being ramped up. It'll also be investing in growing Instagram and its VR capabilities.

Facebook will also be placing more focus on the tougher to monetise, but increasingly popular, personal messaging features. That means revenue growth is set to slow going forwards.

The double whammy of weaker revenue growth and higher costs is bad news for profit margins. They're set to fall to somewhere in the mid-thirties in the foreseeable future - some way behind last year's 44.6%.

We can understand the rationale. You've got to invest to stay ahead in tech, and making sure Facebook is what users want and trust is crucial.

Uncertainty around the transformation brings risk, and the FTC's investigation into privacy matters shows the hangover from the Cambridge Analytica scandal hasn't quite cleared. Nonetheless, a few reassuring quarters has got the group back in vogue with investors.

The share price bounce takes the PE ratio back north of 20, which likely removes some of the immediate recovery potential.

Still, Facebook looks well placed to us. It remains an invaluable resource for advertisers, and with user numbers and revenue per user both still growing, earnings are expected to rise by over 44% by 2021.

The balance sheet is packed with cash too. Some of that cash is coming back through share buybacks, but investors shouldn't expect a dividend yet. The transformation remains the focus for now.

The road ahead could well be a winding one, but Mark Zuckerberg has shown excellent judgement in the past and his changes are clearly with the long-term in mind. Therefore we think the group deserves the benefit of the doubt for now.

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Q1 trading details

Facebook recorded an 8% increase in monthly active users, to 2.38bn. Revenue per user rose in each of the group's four geographies, with the average 16.1% ahead at $6.42. All regions saw user numbers rise too, with the split as follows.

  • US & Canada up 0.8% to 243m
  • Europe up 1.9% to 384m
  • Asia-Pacific up 12.4% to 981m
  • Rest of World up 8.9% to 768m

Add in the users of Instagram, WhatsApp, and Messenger, and the group estimates 2.7bn people now use at least one of its apps every month.

Operating profit was down 39% to $3.3bn. Underlying operating expenses rose 34.4%, which includes a 36% increase in headcount, and a $3bn legal expense, which could rise to $5bn. That comes as a result of a Federal Trade Commission investigation into privacy matters, which include the Cambridge Analytica scandal.

Free cash flow rose from $5bn to $5.3bn, despite capital expenditure rising from $2.8bn to $3.8bn. That helped the group's net cash position increase to $45.2bn.

Looking ahead, Facebook still expects revenue growth rates to decelerate sequentially throughout 2019 on a constant currency basis, but has adjusted cost and capex estimates. The group now expects full-year 2019 expenses to grow 47-55% compared to prior guidance of 40-50%. Strip out the legal provision however, and that new guidance is lower. Similarly, capital expenditure has been nudged down from $18-20bn to $17-19bn.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.