Thursday, January 30, 2014

FB: Facebook had another impressive quarter

Well, what can we say, except that Facebook (FB) beat expectations on the top and bottom-line when it reported its Q4 numbers after the close on Wednesday.  We added projections for FY '18 and also updated our valuation of FB to $28.39/sh, from $25.94/sh.  Obviously, we still think it is overvalued, but we certainly have been wrong before.  It closed at $53.53 on Wednesday, but it appears it will open at around $60.00 as many will applaud its better than expected Q4 results.

Q4 revenues came in at $2.59bil, higher than our $2.26bil estimate.  GAAP net income of $520.00MM was significantly higher than our $392.20mil estimate.  Healthy Y/Y top-line growth of 63% was accompanied by Q/Q and Y/Y EBIT margin expansion of approx. 700bps and 1000bps, respectively.

While we were a bit more accurate (or optimistic) when it came to our MAU (monthly active users) projections (provided below), we underestimated the uber-enthusiasm of companies and marketers regarding mobile ads.  Our ARPU (avg. revenue per user) estimate was much lower than what FB reported.  

We think this was due to curiosity still surrounding ROI's or potential ROI's of mobile ads, as the number of ads actually declined. The lower ad impressions were due to more ads being placed on mobile platforms.  We expected this as we've mentioned before, due to limited space on mobile platform compared with desktop.  However, the much higher price of mobile ad impressions more than offset the lower volume or count.  We still believe that we will see deceleration in price growth as ROI's on mobile ads begin to flatten out, accompanying less click-throughs on newsfeed ads.  Sooner or later, companies and advertisers will realize that as FB becomes more of an open network, similar to Twitter (TWTR), FB's so-called differentiation goes away, pushing down prices advertisers are willing to pay.  This might start taking place in 2H of FY '14.  In fact, we think such uncertainty - deceleration in prices catching up with less volume - might be one of the reasons why management did not provide color on FY '14 revenues.  Management does not usually provide numbers regarding top-line guidance, but it does give the Street an idea about different revenue drivers and whether they are healthy going forward.  In our opinion, when it came to FY '14 revenues, management was somewhat silent.  

Regarding payments revenues, which we still think will work better in the long-run on mobile platform, Zuckerberg mentioned that they are working on app install ads, where if a user purchases an app that was advertised on the FB mobile app, FB would likely get a piece of that revenue, even though the payment is actually processed by a third party.  

Management did not have much to say regarding their Graph Search product as it remains in its early stages.  We still think that early adoption of that product will not be as impressive as FB's other products.  Given the latest news on NSA basically tracking everything everyone does, many would likely think twice before becoming fully engaged with products such as Graph Search.  We certainly praise Edward Snowden for letting everyone know to what extent the privacy of Americans and others worldwide (incl. the leaders of US allies and other countries) is not respected by the US government.  

The margin expansion witnessed in Q4 was very impressive; however, it was due to the seasonally higher sequential top-line growth.  In addition, management indicated that it expects total operating expenses (incl. stock-based compensation) to increase 35% - 40% Y/Y this year, which means revenues will need to grow a healthy 35%+ to maintain the near 36% EBIT margin we saw in FY '13.  We think revenues will grow around 27%, which will result in EBIT margin of 30%, which is certainly healthy.  Again, we added our FY '18 projections (below).  It takes time for the market to recognize the fair value of a company, whether that company's value is too heavily discounted or inflated.  We remain positive regarding FB's services, as we mentioned in our initial post on the Company; however, we continue to think the stock is overvalued.  Based on Wednesday’s closing price, FB’s FY ’14 EV/Sales and EV/EBITDA are approx.. 13 and 30, respectively.  We are proven wrong for the third quarter in a row, but we have patience.  

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