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Facebook - revenue beat, but cautious outlook

Sophie Lund Yates (Equity Analyst) | 29 July 2021 | A A A
Facebook - revenue beat, but cautious outlook

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Facebook Inc Com USD0.000006

Sell: 364.50 | Buy: 364.71 | Change -8.34 (-2.24%)
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Second quarter revenue rose 56% to $29.1bn, reflecting a 56% rise in ad revenue to $28.6bn, and a 36% increase in other revenue. That was some way better than analysts expected.

Despite higher costs, operating profit more than doubled to reach $12.4bn.

However, Facebook warned: "In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth".

Comparing revenue to pre-pandemic times, Facebook expects a slowdown in the second half of the year. It also reiterated further headwinds are expected relating to Apple software updates, which will affect targeted ads.

The shares fell 4.0% in pre- market trading.

View the latest Facebook share price and how to deal

Our view

We said last quarter that Facebook had knocked it out the park, and, well we're stumped for how else to put it this time around. Once again ad revenues have headed skywards, and profits have more than doubled. This wasn't enough to impress the market though, which we suspect is jittery over ongoing headwinds relating to privacy and regulatory challenges - more on that later. But while growth is expected to slow, the core of Facebook's attractions remain in play.

Advertising revenue is Facebook's bread and butter, with marketing teams paying handsomely to make the most of the data footprints users leave behind. With around half the world's population logging onto one of Facebook's apps (the obvious one, plus Instagram and WhatsApp), Facebook's significance isn't going anywhere.

As one Facebook analyst put it, ''Covid has accelerated the obvious...everything is going digital.'' Which means an accelerated shift to online shopping - a higher margin source of ad revenue for Facebook. And the group is far more exposed to shopping than service advertising - like travel. The tailwinds will make comparisons more difficult, but is still a net positive in our opinion.

Added to that, Facebook's plans to build a so-called metaverse, a virtual space where users interact in the form of avatars, already popular in the gaming world. This is little more than an ambition for Facebook at the moment, but the insularity bred by lockdowns could act as a catalyst for users. If the idea comes to fruition, it could be a valuable income source - having users become even more immersed in its stable of social networks would ultimately mean advertisers are willing to part with more money for the data those users leave behind.

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, profits are still growing - but revenues are expected to mellow compared to the heady growth of late, so margins could come under pressure. The group is spending heavily on its data centres and networks in particular.

Facebook's huge scale means increased investment is needed to keep regulators happy - particularly around security and compliance measures. Changes to the Apple operating system and increased European regulation both have the potential to disrupt ad revenues too. This isn't the first time Facebook's stared down the barrel of a regulatory or privacy problem, and it won't be the last.

We think the core business remains attractive because of Facebook's unrivalled reach into our lives. With that strength in mind, the share price valuation is also worth considering. However, investors need to be prepared to accept the external risks - Facebook's firmly in the political spotlight so ups and downs are likely.

Facebook key facts

  • Price/earnings ratio: 26.0
  • Average Price/earnings ratio since listing (2012): 31.8
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. 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 results

The increase in ad revenues was driven by a significant increase in the average price-per-ad compared to last year, while volumes were up 6%. The group expects prices to continue to drive ad revenue increases for the rest of the year.

Total costs and expenses were $16.7bn, up 31% on 2020. Within that, research & development spending rose from $4.5bn to $6.1bn, and marketing costs were up 14.8%, at $3.3bn. Facebook has 21% more staff members than last year.

The number of Facebook's daily and monthly active users rose 7% to 1.9bn and 2.9bn respectively. Including the group's other social networks, the number of daily active people was 2.8bn, up 12%.

As of the end of June, Facebook had $64.1bn in net cash, compared to $62.0bn at the start of the year.

The group also reiterated plans to build a "metaverse", which is a virtual space where users interact in the form of avatars, already popular in the gaming world.

The outlook for expenses is unchanged. Facebook still expects total costs of $70-$73bn, as it ramps up investment in technology and product expertise.

Find out more about Facebook shares including how to invest

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 Refinitiv. 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.

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.