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Facebook - more users help profits grow

Nicholas Hyett | 31 October 2019 | A A A
Facebook - more users help profits grow

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Meta Platforms Inc Com USD0.000006

Sell: 175.25 | Buy: 175.27 | Change 0.42 (0.24%)
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Facebook reported third quarter revenues of $17.7bn, up 29% on last year and ahead of market expectations.

Costs were also lower than anticipated, meaning operating profit was up 24% at $7.2bn.

The shares rose 4.5% in afterhours trading.

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Our view

More than a quarter of the world's population use Facebook's social networks every day, generating bucketloads of data as they go. That makes it a Mecca 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.

All that data gives Facebook great power, but with that power comes great responsibility, and responsibility is expensive. Data security and fighting against fake news means costs are rising. As does increased investment in other growth opportunities, like VR capabilities and powering a new virtual currency, Libra. Then there's sprucing up tougher to monetise, but increasingly popular, personal messaging features like Whatsapp and Messenger.

All-in-all, the shopping list is getting longer, and revenue is expected to slow. That's a tough combination for profit margins. They're set to fall to somewhere in the mid-thirties in the foreseeable future - well 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 provides what users want and trust is crucial. But uncertainty around the transformation brings risk, and regulatory scrutiny's intensified following the Cambridge Analytica scandal.

Still, for all the bluster and negative PR, Facebook looks well placed to us. It remains an invaluable resource for advertisers. With user numbers and revenue per user both still growing, and growth platforms like Instagram driving forward too, earnings are expected to rise by about 50% by 2021. Not bad for a company whose shares currently change hands for 21 times expected earnings, some way below the longer run average of 33.4.

Like many tech giants Facebook's balance sheet is packed with cash. But unlike say Amazon, some of that cash is coming back through share buybacks. Investors shouldn't expect a dividend yet though, the transformation remains the focus for now.

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Q3 trading details

Revenue growth reflects both rising user numbers and increased revenue per user. Monthly Active Users (MAUs) were up 8% to 2.45bn, and Daily Active Users (DAUs) of 1.62bn rose 9%. The wider Facebook group, which includes Instagram and WhatsApp, is estimated to attract 2.2bn daily users.

Mobile advertising revenue accounted for 94% of total revenue, up from 92% last year.

Earnings per share increased 19.7% to reach $2.13. Total costs rose 32% to $10.5bn. The increase includes higher research and development costs, and a 28% rise in headcount. Operating margins were 41% (2018: 42%).

Capital expenditure, including lease payments, was $3.7bn for the quarter. Improved profitability helped free cash flow rise 35.6% to $5.6bn, and cash on hand reached $52.3bn.

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