Thursday, May 2, 2013

FB: Slightly Mixed Q1 Numbers; Remains Over-valued

Facebook (FB) Q1 numbers, reported Wednesday after the close, were a bit mixed.  Revenues of $1.46bil were slightly higher than the $1.44bil consensus, while $0.12 non-GAAP EPS were slightly below the Street's $0.13.  The miss on the bottom-line was due to the Company's increased costs and expenses, which went up 60% compared to a year ago, while revenues grew 38%.  Operating margin of 26% was significantly less than 36% in Q1 '12.  The Company continues to increase headcount and spend money on infrastructure, according to management.

As we said before, although revenues came in better than expected, the same issues linger - slowdown in user growth within the most profitable region (North America), while better user growth is in regions with much lower ARPUs (although growing); and monetization of users moving onto mobile devices.  In our opinion, FB is taking the right steps to address these issues, but it will take time to see if those moves will be considered as successful.  From a fundamental standpoint, the stock remains overvalued.  FB was up $0.08, or 0.30%, in AH trading.  

Growth in North American MAU continued to slowdown.  Y/Y MAU growth in that region was only 6.6%, while growth in Europe, Asia, and other regions were 12.6%, 36.3%, and 33.5%, respectively.  This is compared to Y/Y growth rates of 7.8%, 14.0%, 40.6%, and 35.1% in Q4.  

Again, highest ad ARPUs came from the slowest growing region, North America; although it grew 23.6% Y/Y.  We must note that ad ARPU in the 'other' regions did grow north of 42% Y/Y, but it was only $0.46.  In fact, revenues from that region accounted for only 12% of FB's total revenues, while revenues from North America were 44%.  So, geographically speaking, we have the North American region users growing at the slowest rate, but generating highest ARPU.  From a positive standpoint, we could say that this demonstrates success in monetizing the user base over time; and we could see similar success in other regions.  However, we must note that not everywhere is as consumer driven as the US. 

Mobile monetization is moving along as based on total mobile MAU of 751MM, we estimate mobile ARPU was $0.58 in Q1.  However, this figure is below last quarter's $0.63.  While some may argue that part of this is due to seasonality, we must note that seasonality is slightly discounted when it comes to such a hot platform that remains in its early growth stages.  So, that nickel decline in mobile ARPU is a bit concerning.  We will have to wait until 2013 Q4 results to get a better idea of whether or not mobile will continue to grow significantly and/or it will cannibalize desktop based revenues, which remain strong but many users continue to switch to the mobile platform. 

While we continue to believe the Company is moving in the right direction, the FB stock remains over-valued in our opinion.  We did not make significant changes to our model.  FB is trading at more than 35x 2013 EPS with a PEG of 1.6; and at nearly 48x trailing EBITDA.  From a valuation standpoint, this is a bit alarming given that we are seeing more costs & expenses and lower margins.  We upped our FCF estimates slightly, driven by higher than expected revenues and partially offset by lower margins.  Our 5-year DCF model, which we think is appropriate for this company as it remains in a growth (hopefully!) and investment mode, spits out a $23.50/sh valuation, $0.50/sh higher than our previous estimate.  The stock closed at $27.43 on Wednesday.  We note that since we suggested shorting FB in May '12, potential return has been approx. 20%, pretty much in-line with how much the S&P 500 index has increased since then.

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