Facebook stock is on pace to have its best month since July 2013, after the social media titan reported Q4 earnings that blew out Wall Street and investors’ expectations.
The company has been entangled in a sticky web of data privacy scandals and misinformation woes, but somehow managed to deliver surprisingly strong user numbers and also grew ad revenue across its platforms.
As market watchers’ digest the financial results and attempt to understand the future trajectory of the company, here’s how Wall Street is breaking down the Facebook narrative in six simple points.
1. Users are sticking with Facebook
“The users are still there: 2.7b [monthly active users] and 2b [daily active users]. In other words, 26% of all humans on planet Earth use a Facebook property every day. Despite the horrific headlines over the past year, users are sticking with Facebook. This tells us that a significant percentage of humans find value in Facebook,” Benjamin Schachter, an analyst at Macquarie, wrote in a note to clients on Thursday.
“[A]s long as the users are there, Facebook can find ways to monetize. As long as Facebook continues to provide utility for users, we think it will continue to attract advertising dollars. Importantly, mgmt.’s tone is much less defensive, as it shifts to articulating a story of growth and utility while investing in security. Communicating with more transparency is a [management] focus area for ’19. We think that is a good thing.”
2. From crisis management to innovation
“The most important takeaway was the more offensive stance toward product development and revenue-generating initiatives vs managing security/content issues,” Stephen Ju, a Credit Suisse analyst, wrote in a note on Thursday.
“Facebook management delivered a cogent review of the issues it faces and has a sound strategy to address those, in our view, based on greater content scrutiny, groups, ephemeral posting, and encryption,” Andy Hargreaves, a KeyBanc analyst, said on Wednesday. “If it executes against these, we believe it could significantly improve both public and investor perception of the platform, which could drive multiple expansion.”
3. Risks are still prevalent
“We feel we could be in a period of sustained re-rating as the worst FB fears appear not to have been realized,” Mark Mahaney, an RBC analyst, wrote in a note to clients on Thursday.
“CFO Dave Wehner indicated that the broader privacy landscape could impact targeting/attribution capabilities for certain campaigns (pricing headwind), in addition to a potential global macro slowdown impacting ad budgets(although FB/IG budgets would likely be among last to be curtailed given high ROI),” Colin Sebastian, an analysts for Baird, said on Wednesday.
4. Lean into Stories
“Facebook now has 2mn advertisers spending on Stories. These green shoots (and FB’s continued product innovation through products like “automatic placements”) bode well for long-term ad revenue growth,” Morgan Stanley analyst Brian Nowak wrote in a note on Thursday.
“Instagram Stories now has 500mn [daily active users], and we believe Stories was one of the drivers of Facebook’s platform-wide ad unit impression acceleration,as ad impression growth accelerated to 34% Y/Y, the fastest growth since 4Q . Ad dollars are now moving toward this rapidly growing format – as advertisers look to capitalize on FB’s leading reach – but given we believe Stories ad unit pricing is still 20-50% lower than News Feed (kept intentionally low by FB as they work to improve performance), further improved Stories monetization could bring a double-barreled benefit to ad revenue growth (ie, impression growth and pricing/performance improvement) if FB can improve ad efficacy.”
5. Growth opportunities continue to emerge
“Facebook’s innovation pipeline outside of Stories is strong too, as the company talked about increasing innovation around 1) Messaging 2) Payments 3) Facebook Groups 4) Facebook Watch 5) AR/VR and 6) Instagram commerce,” Nowak explained. “We are particularly bullish about the Instagram commerce opportunity as we believe Instagram’s ‘browsing and inspirational’ behavior is suited to lead to e-commerce transactions and ad monetization. In our view, Instagram’s ability to better link its advertisers’ dollars to actual transactions could help them better penetrate the $200bn+ spent on marketing services.”
“Longer term, material monetization of messaging sounds like it could be a 2020 event, though payments on WhatsApp are being rolled out more broadly,” Nomura’s Mark Kelley said on Thursday.
6. The near future may prove better than expected... again
“Management gave a cautious guide of mid-single digit growth rate deceleration in 1Q19 that would continue through the year on a constant currency basis,” Suntrust analyst Youssef Squali wrote in a note on Thursday. “Recall management provided a similar guide for 4Q18 before showing a smaller deceleration, which mgt credited to stronger advertiser demand in a seasonally strong period, and better than anticipated supply from IG.”
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter: @heidi_chung.
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