Reviewing Facebook’s Performance In 2017

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Facebook‘s (NASDAQ:FB) stock is up about 55% year-to-date (YTD) and 50% in the last year following solid results in the first three quarters of 2017. In terms of financial performance and engagement metrics, the company significantly outperformed expectations in the first nine months of the year. Facebook registered 47% year-on-year growth in revenue to about $27.7 billion in the first nine months of 2017, driven by solid growth in advertising. Operating income grew by over 60% to $12.85 billion and the company’s operating margin improved from 41.7% in the first nine months of 2016 to almost 47% in the first nine months of 2017. This helped Facebook post impressive 73% year-over-year (y-o-y) earnings growth in the period to $3.95 a share.

In this note, we discuss Facebook’s performance in the last eleven months.

  • Advertising Revenue Growth: Advertising revenue, Facebook’s primary source of revenue, grew 49% to over $27.6 billion in the first nine months of 2017 driven by growth in mobile ad revenues across geographies. Mobile ad revenues contributed 87% of total advertising revenues, up from 83% in the same period last year. Mobile ad revenues grew due to an increase in both the frequency of ads shown in News Feed as well as the price per ad. The average price per ad increased 10% and total ad impressions rose 35% in the first nine months of 2017 over the same period last year. Facebook’s management stated in its third-quarter earnings call that video ads are growing, particularly video ads on mobile phones. The company has implemented a host of video ad formats that should help the company grow its share of the online video ad space. This should help drive the next wave of ad revenue growth.

  • Monthly Active Users: There was 16% y-o-y growth in Facebook’s monthly active users (MAUs) to 2.07 billion at the end of September 2017. To put this in perspective, this means that about 27% of the world’s population logs in to Facebook on a monthly basis. This ratio varies from about 65% in the U.S. and Canada to 15% in the Asia-Pacific region. Facebook’s monthly active user base remained strong across platforms, including Instagram, WhatsApp, and Messenger. At the end of September 2017, the number of MAUs on Instagram, WhatsApp, and Messenger were 750+ million, 1.3+ billion and 1.5+ billion, respectively.
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  • Free Cash Flow Growth: One of the impressive things about Facebook’s business model is its ability to increase free cash flows faster than its top line. Despite a 39% increase in capital investments over the same period in 2016, Facebook’s free cash flows increased 52% y-o-y in the first three quarters of 2017. This should help the company continue to make investments into newer areas such as virtual reality, augmented reality and artificial intelligence.

We currently have a $165 price estimate for Facebook’s stock, which is slightly below the current market price.

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