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Media Talk

Another Good Quarter But Facebook Range Bound for Near-Term

Facebook (FB) reported another strong set of earnings, again beating the high bar set by Wall Street estimates.  Revenues grew 51% ahead of expectations in the high 40% range.  Mobile ad growth continues to lead the way, up 61%, and now accounting for 84% of total revenue.  Profitability also exceeded expectations with GAAP margins of 52% about 400 basis points ahead of the street.  As a result, EPS came in at $1.41 versus the consensus estimate of $1.31.  Underlying usage metrics support FB’s strong growth.  Monthly and daily active users and time spent on the site all grew nicely on a year over basis.  Ad pricing also looks firm.

FB shares are trading around flat following the report as investors remain concerned about revenue growth being at peak levels and a modestly higher guide for expenses to growth 47-57% in 2017.  Given that revenue growth has been north of 50% for the past year, the “material” slowdown projected by management is acceptable.  Growth should still be in the 30-40%, an extraordinary level for a company of FB’s size, and a growth rate that far exceeds any comparable advertising driven company.  Growth will be shifting toward video usage and it is not clear how FB will be able to monetize the massively growing viewing of videos on its site.  This will give investors a little heartburn until later in 2017.  Northlake is less concerned on revenues as we see FB much like a better version of broadcast TV networks.  Similarly, the reach is unrivaled but with the added benefit of specific targeting.  Broadcast TV CPMs have risen steadily against falling ratings.  FB should have no problem raising ad pricing given its reach, targeting, and still growing user base.

Investors are a little more concerned about FB’s expense guidance which also included higher than expected capital spending.  The company has consistently guided expenses conservatively and easily produced much better than implied profit margins.  2017 expense guidance seems hard to reach when looked at on absolute basis, so we expect the company to see expenses grow at the low end of guidance.

All together, we now see FB earning between $5.50 and $6.00 in 2017, up from $5.00-$5.25 at the time of our last quarterly review.  We see FB shares as range bound for a few months until there is greater clarity on the 2017 outlook and upside vs. guidance.  We believe that will occur at which point the shares can move above $150 as investors look forward to 2018 earnings of over $7.00.

FB is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.  FB is a net long position in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

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