Despite some worries related to recent changes to Facebook’s (FB) News Feed, the company reported another outstanding quarter with revenues rising 47% and operating leverage again evident even as the company continues to caution about increased spending. More importantly, the company’s words and tone when discussing the impact of changes that could limit time spent on the News Feed and the number of users was decidedly confident. Yes, time spent on Facebook fell 5% during the fourth quarter and engagement measures flattened or dipped slightly in the U.S. and Canada. However, it appears the changes are no impacting advertiser use of the platform and continued high ROIs for advertisers are driving pricing ever higher. In fact, the 47% revenue growth last quarter was composed of 43% price increases in CPMs and just 4% unit growth.
Facebook has been warning of slowing ad growth for almost a year as the News Feed just can’t sustain any more ads without really hurting engagement. Unit growth is coming from Instagram which is still growing rapidly. Messenger and WhatsApp still look poised to monetize ads, though the company remains cautious in developing those businesses; probably because it is unnecessary giving still soaring growth at Facebook and Instagram.
The changes announced late in 2017 to adjust the News Feed algorithm to emphasize friends and family posts over third party news and viral videos created risk that lower usage or time spent on Facebook would lead to lower expectations for revenue growth. This was not the case in the case in 4Q17 when the changes were fully in place and management seems very confident that will not happen in 2018. The bull argument is that cleaning up Facebook after all the issues related to the 2016 elections and fake news will actually create a more valuable platform for users and, in turn, advertisers. Early evidence suggests this is the case.
FB shares rallied on the quarter after lagging the market’s gains in fear of a lowered outlook for 2018. With that risk seemingly put to bed, we think the stock can trade up toward $250 as the year moves along and investors focus on what could easily be north of $10 per share in 2019 earnings. Northlake is sticking with client long positions in FB.
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.