Facebook Q3 – See Saw economics

There are signs of stability that Wall Street will over interpret.

• Facebook comfortably beat forecasts but comments around usage and limiting the degree of monetisation caused a 15% reversal in the share price after hours.
• Q3 revenues / EPS were $2.02bn / $0.25 compared to forecasts of $1.91bn / $0.19.
• Mobile revenues were very strong at $880m (49% of advertising revs) matching the fact that 48% of users now access the service via a mobile device.
• Advertising revenues growth was 66% YoY driven by a 16% increase in impressions and a 42% increase in price per ad.
• This is a strong indication of the improvements that Facebook has made in the quality and relevance of its advertising placements.
• However, the slower growth in ad impressions themselves and the stabilising user ad usage metrics are signs that growth is likely to moderate from the heady 66% seen this quarter.
• This will be further exacerbated by the sensible decision not to lace the news feeds with more ads.
• This is very important for the user experience but it will have the effect of slowing growth further as the inventory for sale will now be stable.
• This is not new news and indeed the company discussed this issue on its call last quarter.
• This is what is what will drag down expectations but it is worth remembering that online advertising still has a long way to go.
• For example, people spend more time consuming digital services than they do watching television but it is still only a fraction of the advertising budget.
• Hence, I think that there is still plenty of growth to be had from the migration of advertising spend to online media and services.
• However, it is not going to be anything like the kind of growth we have seen this year.
• It looks to me that estimates are going to begin coming down for 2014 and that’s where I see the opportunity as the chances are they will come down way too far.
• Wall Street is very fickle in its loves and loathes and I would wait for all the disappointment to set in before attempting a second bite of the apple.