Facebook Q1 17 – Sleeping policeman

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Facebook’s growth story hits a temporary bump for 2017.

• Facebook reported good results but once again tried to temper enthusiasm with reality by saying that overall growth this year would slow materially.
• Q1 17A revenues / EPS were $8.03bn / $1.04 nicely beating consensus at $7.8bn / $0.86.
• Advertising revenue was $7.9bn of which mobile was $6.7bn making up 85% of total advertising revenues.
• The user count has now hit 1.9bn MaU (1.3bn visiting every day) with the vast majority coming from mobile.
• Video and Instagram remain the biggest drivers of growth but Facebook has reached a limit in terms of the amount of advertisements that it can stuff into its apps.
• Further increases could improve revenues in the short term but would probably lead to a fall in engagement which would negatively impact revenues anyway.
• Hence, Facebook is turning to other avenues to find growth.
• With its existing mature apps, Facebook has 36% of the Digital Life Pie and this is now fully monetised.
• This is why, I have long been of the opinion that to become a $40bn revenue company, Facebook needs to increase its coverage of Digital Life.
• The good news is that the signs of this continue to strengthen and at its developer conference, Gaming and Media Consumption were in sharp focus.
• The issue is that I don’t think that Facebook’s Media Consumption offering or its Gaming strategy are mature enough to really start generating revenues which is why revenues will really start to slow down this year.
• The street is expecting a 40% YoY improvement in revenues this year which I think is unattainable.
• However, once those new services hit maturity, I think that Facebook will once again, be in a position to beating expectations.
• Consequently, as the disappointment sets in for lower growth in 2017, I expect the valuation of the stock to moderate.
• This will be driven by straight-line-loving (of which I am equally guilty) analysts bringing down their long-term forecasts in response to short-term issues.
• It is at the point that the greatest opportunity exists to invest in Facebook for the next leg of its development.
• In the meantime, I continue to prefer Microsoft, Baidu and Tencent.