Facebook Q4 16 – In focus

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Facebook intends to kill the YouTube star.

• Facebook reported good results and highlighted that while 2017 would be much slower, video is the current priority to drive the next leg of growth.
• Q4 16A revenues / Adj-EPS were $8.81bn / $1.41 nicely ahead of consensus at $8.51bn / $1.31.
• Mobile was once again the main driver of revenues making up 81% of revenues and growing 61% YoY, echoing the strong numbers reported by Alphabet.
• Facebook reiterated that growth in 2017 would slow markedly, as it has fully monetised the traffic that it already has, but it is well advanced in seeking other avenues.
• In the next 3 years, the priority is clearly video and I can see Facebook evolving to become more like YouTube or Netflix.
• These developments are already underway with the latest innovation being the addition of a tab at the bottom of the Facebook app that has top trending videos as well as recommendations for the user.
• This makes Facebook video look far more like YouTube which I see as an encyclopaedia of video which Facebook clearly intends to emulate.
• If Facebook can establish itself as a real rival to YouTube, this will bring its content consumption offering to maturity and I will be comfortable increasing its Digital Live coverage from 36% to 46%.
• I think that it is still too early to call Facebook a real destination for video, but it is steadily moving in this direction.
• In Gaming and Facebook M its efforts are far more nascent and I see these two appearing in Facebook’s 5 year strategic horizon.
• While the long-term outlook for Facebook remains good in terms of Digital Life coverage, artificial intelligence remains a big concern.
• Facebook has made some big hires in this area but its algorithms remain basic at best and deliver an awful user experience.
• RFM research indicates that almost every time Facebook tries to use intelligent automation, things go badly wrong leaving Facebook having to fall back on humans.
• While this is not a huge problem today, if Facebook continues to rely on humans to customise the user experience for its users, OPEX will start growing much more quickly than sales.
• My concern is not that Facebook can’t fix it but that it will take it a very long time, leaving it still behind its rivals who are already miles ahead and investing heavily.
• This is why I think that Facebook will end up having to make a lot of acquisitions in this space over the next 3 to 5 years.
• With a slower outlook for 2017 and the share price back to its all-time high, I can not get excited about the stock as there are challenges that need to be overcome before the next leg of growth materialises.
• I continue to prefer Microsoft, Tencent and Baidu for capital growth and Apple for income.