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Facebook, Inc. (FB - Free Report) reported yet another better-than-expected quarterly performance. Shares were up nearly 4% in the market session.

The company’s second-quarter 2017 earnings of $1.32 per share and revenues of $9.321 billion beat the Zacks Consensus Estimate of $1.13 and $9.173 billion respectively.

On a year-over-year basis, both the metrics grew 74% and 45%, respectively. Facebook’s mobile and live-video efforts continue to pay off big time. Instagram has also emerged as an important cash cow.

Quarterly Numbers in Details

Revenues surged 47% from the prior-year quarter, excluding the impact of year-over-year changes in foreign-exchange rates basis.

Facebook’s consistently expanding user base remains one of its biggest growth catalysts. Its monthly active users (MAUs) were up 17% year over year to a staggering 2.01 billion. Daily Active Users (DAUs) were 1.32 billion, reflecting a 17% increase year over year.

Facebook, Inc. Price, Consensus and EPS Surprise

Facebook, Inc. Price, Consensus and EPS Surprise | Facebook, Inc. Quote

Advertising revenues were $9.164 billion, jumping 47% year over year. Growth was driven by increasing mobile engagement, higher number of marketers and consistent investment in new products.

Mobile ad revenues in the quarter were $8 billion (up 53% year over year), contributing 87% to total ad revenues. Ad impressions grew 19%, driven by surging mobile ad impressions on both Facebook and Instagram platforms. Average price per ad increased 24% from the year-ago quarter.

Payments and other fees decreased 20% year over year to $157 million in the reported quarter, owing to a reduction in payment revenues related to PC games. Management expects revenues from this segment to face further decline as PCs lose market share. 

Cost and expenses elevated 33% to $4.92 billion due to increase in workforce and marketing expenses. However, robust revenue growth provided enough cushion to operating margins. Operating income of $4.4 billion grew 61% year over year.

Balance Sheet & Cash Flow

Facebook exited the quarter with cash and cash equivalents, and marketable securities of $35.45 billion.

The company generated nearly $5.36 billion of cash flow from operating activities in the first quarter of 2017 compared with $3.67 billion in the year-ago period. Free cash flow was $3.92 billion compared with $2.67 billion in the year-ago quarter. The company incurred capital expenditure of $1.44 billion in the reported quarter.

Outlook

GAAP expenses are projected to increase in a band of 40­–45%, narrower than the earlier expected range of 40–50%. Capex is likely to be at the lower end of the earlier guided range of $7–$7.5 billion. The company anticipates 2017 to be a year of aggressive investments. It plans to build more data centers as well as recruit more engineers to fuel its artificial intelligence (AI) and augmented reality/virtual reality (AR/VR) technology ambitions.

Our Take

We remain positive on Facebook as it works on becoming a tech powerhouse. CEO, Mark Zuckerberg aspires to make the company much more than just a social media platform. Facebook continues to work on monetising its subsidiaries as well as developing cutting edge AI and AR/VR technology.

Currently, advertising revenues are the mainstay of the company’s top line, driven by mobile ad revenues. Mobile monetization has increased with a higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads.

Facebook’s foray into “Live” is expected to be a big contributor to the top line. The company has been aggressively promoting “Live” in order to capture the opportunity presented by ever-increasing video viewing on social media platforms. Reportedly, Facebook’s first slate of original programming will start streaming from this August.

Given the phenomenal increase in mobile ad business and video efforts, the stock has vastly outperformed the broader market. In the past one year, Facebook’s shares have generated a return of 34.3%, compared with the industry’s gain of 20%.

Also, ever since its availability to worldwide advertisers last year, Instagram’s ad platform emerged as an important revenue stream. With over 700 million users, Instagram is now set to join the company’s other billion-plus platforms ­­– Facebook, Messenger and WhatsApp.

The Instagram Stories platform was opened to global advertisers in March this year. Notably, Stories now boasts 250 million DAUs. With successful monetization of Instagram, Facebook said it is working on monetizing Messenger and WhatsApp. However, Zuckerberg stated “I want to see us move a little faster here, but I'm confident that we're going to get this right over the long term.”

 A few weeks back, management had announced that Facebook will be opening its subsidiary platform, Messenger, to worldwide advertisers, albeit for test run purpose only. This underscores the company’s efforts to monetize the platform.

Facebook’s huge user base of over 2 billion enables it to fend off competition. However, with the user base already at sky-high levels, a relative slowdown is imminent. Furthermore, the company is approaching full penetration in the North American and European markets. Nevertheless, growth in Asia and the rest of the world should help cushion user growth in the foreseeable future.

Facebook is currently facing a number of challenges. It needs to tread cautiously so as not to irritate users with too many ads. Competition from the likes of Snapchat (SNAP - Free Report) , Twitter (TWTR - Free Report) and Alphabet’s (GOOGL - Free Report) Google for ad dollars is also concerning. Moreover, costs continue to rise as the company goes on a hiring spree.

At present, Facebook carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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