Bank analysts react to Facebook’s 3Q results, decelerating revenue growth for the 4Q were modestly improved.
Reaction to Facebook’s 3Q results
Revenue at $13.7bn slightly missed the Street at $13.8bn, but was in-line ex-FX, operating profit was in-line and GAAP EPS of $1.76 was above the Street at $1.47 on lower taxes. Ex-FX ad revenue growth was 35% y/y, down vs 38% in 2Q’18, which we see as well managed deceleration. DAU growth was 9%, slightly below the 10% expected in the model, but would have slightly beat excluding calculation methodology change. Overall, a solid quarter given usage and revenue concerns into the print. Reiterate Buy.
Facebook's 3Q results slightly miss revenue expectations, beat EPS. Total user growth was stable in 3Q, with DAU and MAU growing 9%+ y/y, in line with expectations. Ad revenue of $13.5B (~34% y/y growth) was slightly below our estimate of $13.6B due to economic challenges in Latin America and currency headwinds. Advertising revenue ex-currency would have grown 35% and beat our estimate. EBITDA (incl. SBC) of $6.9B was below our $7.2B estimate as higher COGS (related to hardware sales) and lower D&A drove the miss. A lower tax rate drove EPS of $1.76, above our estimate of $1.48.
Facebook's 3Q results were a bit of a mixed bag with lighter top-line and user metrics (even if we scrub MAU and DAU for the new method) offset by better margins and lighter Opex growth vs. expectations. Revenue is expected to decelerate again in 4Q18 in the mid-to-high single-digits off of the 3Q base, which is slightly better than the “high single-digits” offered on the last call, and it was made clear that 2019 will be another significant investment year, though the safety and privacy investments are likely to be in the right place by year end. The revenue trajectory from here seems to depend on how effectively the company is able to switch from a feed-centric platform to Stories as the primary driver, which mgmt. noted will take some time. The Opex growth outlook for 2019 of +40-50% is expected to result in the biggest change in the company’s margin structure, which should continue to moderate from there towards the mid-30% operating margin range the company outlined on the 2Q call (expected to happen over 2+ years). These results equate to business as usual, in our view, which is a good thing. What keeps us on the sidelines, however, is the ongoing debate around the longer term operating margin target of mid-30%, though guidance does suggest we may get there faster than originally outlined. Our target price goes to $161 from $183.
FB reported an inline quarter with ad revenue up 4% QoQ vs our agency checks at 5.5%. GDPR continued weakening EU growth, but stabilizing. Revenue guidance was raised to mid- to high-single-digit deceleration for 4Q18. Expense growth guidance for 2019 was 45% YoY vs 33% consensus. We have been conditioned by aggressive opex guidance over the past three years by 10 percentage points average. Due to higher opex outlook, we lower 2020 EBITDA by 4%. Maintain BUY but lower PT from $245 to $220, representing 12x 2020 EBITDA vs CAGR of 20%. Our thesis remains changed as we believe that there is still are a lot of room to grow based the company’s optionality.
Facebook's 3Q Results - Revenue & MAUs a tad below Street, though the guides for Q4 revenue growth deceleration & FY18 opex growth were modestly improved. FB issued aggressive opex growth guide for ’19, but also disclosed seeing a ramp in overall engagement with Stories and Watch. Reducing ests and PT to $190, but Reit Outperform.
Facebook reported relatively in-line 3Q revenues, which were likely better than feared, and positively revised its 4Q revenue decel expectation. FB guided to higher 2019 operating expense growth (40-50% y/y vs. our 30%) though expects past 2019 that revenues and expense growth should better match. We maintain our Outperform rating though lower our PT to $180 given: 1) we continue to expect solid though decelerating revenue growth (expect mid-20s revenue growth in 2019); 2) increasing monetization of newer platforms (e.g., Instagram, WhatsApp in 2019); 3) we believe valuation is attractive at 20x/17x our 2018/2019E GAAP EPS (vs. 24%/18% growth expectation in 2018/2019).
We maintain a Buy rating and $200 YE19 PT, following inline (i.e. better than feared!) 3Q18 results but cautious commentary around ST revenue/FY19 expense growth. We remain constructive as we believe 1) FB's user base/engagement proved steady in the face of much head winds, 2) prioritization of the user experience/safety should lead to better monetization LT as marketers adopt the new ad products, 3) marketers continue to see superior ROI, 4) Stories seeing increasing levels of engagement, 5) our belief there is some conservatism in mgmt commentary, and 6) valuation remains compelling.
Facebook's 3Q results reported rev/Adj. EPS of $13.7b/$2.09 vs CS $13.1/$1.79 and cons $13.8b/$1.89. Our 4Q18 estimates for rev/adj. EBITDA/adj. EPS are $16.1b/$9.73b/$2.54 vs. prior $15.6b/$10.0b/$2.39. For FY18, our estimates for revenue/adj. EBITDA/adj. EPS are now $55.0b/$33.1b/$8.66 vs. prior $54.0b/$32.0b/$8.22. We maintain our Outperform rating and $210 target price.
FB put up 33% revenue growth, despite a ~100bp headwind for FX (vs 37% in 2Q18), with users growing 10% y/y & ARPU growth 20% y/y. EPS beat was driven by lower opex growth (53% vs our est of 60%) and tax. The focus should now turn to commentary on '19 rev growth, opex and capex. Negative headlines and concerns about deceleration have pressured shares (-20% YTD); however, in the longer term, we still see upside to FB's valuation trading ~17x '19 EPS.
We would be buyers of FB shares following Facebook's 3Q results and see Street estimates appropriately reset, allowing the narrative to shift towards stabilization at core FB, potential re-acceleration from Stories usage and monetization, early ramping in messenger monetization, and a path towards margin stability exiting 2019. The key takeaways from the quarter in our view were (1) Stories seems to be a net positive on engagement, not purely cannibalistic, (2) Zuckerberg acknowledged the importance of margins and FB sees margins stabilizing after 2019, (3) the 4Q revenue outlook improved moderately and the lack of comments aimed at 2019 revenue suggests a comfort with Street models here. We see concerns around opex and core FB engagement likely to recede and excitement over Stories monetization likely to build, particularly after some early positive feedback we noted in our preview. We slightly increase our 2018 and 2019 ad revenue estimates (looking for 26% and 23%, respectively), while increasing our opex (+42% in 2019) and now look for 2019 GAAP EPS of $7.33 (from $7.50) and our 2020 GAAP EPS increases to $9.00 (from $8.50). We increase our TP to $195 (from $192 previously).
Following Facebook's 3Q results whereby revenue and EBITDA came in 1.2% and 3.0% below consensus estimates and management disclosed that 2019 is likely to be another investment year; we reiterate our Market Outperform rating on Facebook, but lower our price target to $176 from $206. While we acknowledge the impact to profitability from the investments around Stories, Video, and security, among others, we also think there is the potential for significant ROI over the next 1-2 years as a result of these investments. For this reason, we reiterate, our Market Outperform rating on shares of Facebook.