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Facebook - advertising revenue returns to growth

Sophie Lund-Yates, Equity Analyst | 31 July 2020 | A A A
Facebook - advertising revenue returns to growth

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Meta Platforms Inc Com USD0.000006

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Revenues of $18.7bn were up 10.7% in the second quarter, compared to last year, and better than the market expected. Within that advertising revenue rose 10.2% to $18.3bn.

Total costs and expenses of $12.7bn rose 3.8%, but the higher revenue meant operating income rose 28.9%.

Facebook also recorded higher levels of daily active users and monthly active users, helped by lockdowns.

The shares rose 5.9% in pre-market trading.

View the latest Facebook share price and how to deal

Our view

Advertising revenue is Facebook's bread and butter, with marketing teams paying handsomely for the data footprints users leave behind.

Luckily, while subdued, advertising trends are better than feared. Being a digital advertiser is a real benefit here because smaller, independent businesses are more likely to turn to the social network. Spending on above-the-line billboard or broadcast advertising is going to take a lot longer to turn back on to full power.

The current disruption also means increased screen time as millions of us are stuck and bored at home. The read across for Facebook and its stable of social media platforms is increased engagement with the likes of the flagship Facebook site, as well as Messenger, Instagram and WhatsApp.

An uplift in usage won't move the dial on revenues at the moment, but it's still crucial that a growing user base likes, and uses, these apps. Without that pillar, plans to monetise the newer networks would fall over.

As ever though, you have to spend to stay ahead in tech, which is reflected in an ever-increasing research and development budget. Despite this, margins and therefore profits are still growing - partly thanks well controlled costs in other areas of the business. We're not going to knock higher profits, but we do wonder if reining in spending too much could delay ambitious plans.

The other thing to keep in mind is that the social and political pressure Facebook's under shouldn't be underestimated. Protecting average revenue per user over the long-term is partly dependent on making sure the user base has faith in the platform.

Anti-competition probes and advertising boycotts are the latest hurdles Facebook has to clear. The group's unrivalled reach into billions of lives means it's rightly in the spotlight, but as it stands these issues shouldn't be a long-term drag if Facebook acts swiftly, and proves it's throwing enough of its very rich resource pile at fixing any problems.

We should make it clear that we don't have qualms about Facebook's ability to survive the current storm. With almost $60bn of cash on hand, this isn't really a concern.

Instead the priority is getting advertising revenue back into the headier levels of growth seen in the pre-pandemic days. Sadly it's a bit of a case of wait and see in terms of a timeframe for this, but there are rumblings from some analysts that Facebook could be set to outperform its guidance next quarter. This wouldn't be the first time the group's been overly-cautious, and investors could benefit if Facebook is in fact on a brighter trajectory than we're being led to believe. Remember though, there are no guarantees.

Facebook key facts

  • 12m forward Price/Earnings ratio: 26.9
  • Average 12m forward Price/Earnings ratio since listing (2012): 32.5
  • Prospective yield: 0%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Second quarter trading details

The number of daily active users rose 12% to 1.79bn, while monthly active users were also up 12% at 2.7bn.

Facebook said the increase in users reflects the impact of lockdowns, and expects DAU and MAU growth to be flat or slightly down in the current quarter as shelter-in-place orders continue to lift. Revenue is expected to grow at a similar rate as Q2 for the remainder of Q3.

That reflects continued economic uncertainty, and the pausing of advertising spending by some as a result of the ongoing boycott. Regulation affecting targeted advertising is also expected to adversely affect revenue in Q3.

The group saw a 32% increase in headcount year-on-year. Research and development spend of $4.5bn was 34.6% higher than this time last year.

Full-year capital expenditures is expected to be around $16bn, at the higher end of the guidance range. That's because Facebook has resumed data centre construction earlier than expected.

The payment of the $5bn FTC fine in April meant quarterly free cash flow was $514m compared to $4.8bn last year. Facebook had net cash of $58.2bn at the end of the quarter, which was 6.2% higher than at the start of the year.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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