Facebook: Connecting the World
05/17/2017 2:50 am EST
Mr. Zuckerberg’s vision underpinned the 2014 acquisition of the WhatsApp message service, Facebook Messenger, and the Facebook Lite and Free Basics services (which have been rolled out in India and other developing markets).
The company now has more than 1.2 billion WhatsApp monthly active users, and has rolled out VoIP and video calling using this service. Facebook Messenger reached 1 billion monthly users in 2Q16. Instagram has more than 200 million daily actives.
There are two critical questions for investors. First, as the growth in ad loads decelerates or stabilizes, will the price of each ad rise to such an extent that it offsets the lower ad loads so that advertising revenue can continue to grow at a fast pace.
Second is whether Facebook will be able to monetize its next-generation services quickly enough to reaccelerate, or at least stabilize, revenue growth as advertising on the flagship Facebook site reaches saturation.
These next-generation services — Instagram, WhatsApp, and Facebook Messenger — are currently in their user growth phase, and may not provide significant revenue growth in the near term.
In addition, management has repeatedly warned that ad loads are likely to slow in 2H17, which could slow overall revenue growth.
These warnings, along with management’s characterization of 2017 as “an aggressive investment year,” have raised the risk of a quarterly revenue or earnings miss.
Nevertheless, we continue to have a favorable view of Facebook, which is well positioned to take advantage of the ongoing movement of audiences and advertisers to mobile digital video.
Facebook also continues to post double-digit growth in its user base and average revenue per user, a remarkable feat for a company this size.
In our view, Facebook’s valuation metrics do not adequately reflect the company’s status as an industry leader.
We are maintaining our BUY rating on Facebook and raising our target price to $176.