Facebook Q3 15A – Hidden dip

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I see a correction before Facebook fulfils its real potential.

• Facebook reported excellent Q3 15A results but the somewhat lacklustre response of the shares in after-hours trading indicates just how much is already built into expectations.
• Q3 15A revenues / EPS were $4.5bn / $0.57 compared to consensus at $4.4bn / $0.52.
• Daily active users passed 1bn for the first time while monthly active users (MaUs) came in at 1.55bn of which 1.39bn are on mobile.
• This was slightly ahead of RFM’s mobile user forecast of 1.36bn and represents a very slight acceleration of the user acquisition.
• This was reflected by revenues from mobile which now make up 78% of all revenues.
• With 400m Instagram MaUs, 700m Messenger MaUs and 900m WhatsApp MaUs, Facebook has a very tight grip on both the Social Media and Instant Messaging segments of Digital Life but not much else.
• This is where things get interesting as the narrow coverage implies that like Twitter, Facebook will run out of growth at some point unless it begins to address the other segments of Digital Life.
• RFM research indicates that Facebook is looking at expanding into Gaming, Search and Media Consumption which would give it 79% coverage and market leadership of the overall pie.
• If this is then combined with RFM’s forecast of 1.7bn mobile users by the end of 2018E, it is not difficult to see how Facebook can increase its revenues by an order of magnitude from here.
• The big question is whether it can get its ducks in a row to benefit from the next leg up before the current growth grinds to a halt.
• RFM’s assessment of Facebook indicates that a vast amount of work still needs to be done both in terms of developing the new services as well as improving and integrating the overall user experience.
• Consequently, I think that Facebook will run out of growth before the next leg can begin.
• I would expect this to be manifested as several bad quarters and a substantial correction in the share price.
• It is then I would be looking to get involved with Facebook as the long-term is looking very good indeed as long as current excellence in execution continues.