Did Facebook's Q2 Earn A Thumbs Up From Analysts?

Facebook, Inc. FB reported second-quarter results that exceeded expectations.

Daily active users (DAUs) of 1.59 billion and monthly active users (MAUs) were consistent with the Street's expectations, but average revenue per user (ARPU) of $7.05 beat estimates of $6.87. The company also confirmed a $5 billion settlement with the Federal Trade Commission in reaction to the 2018 Cambridge Analytica scandal.

Multiple analysts offered their take on Facebook's second-quarter report and management's outlook.

Growth Success And Initiatives

Facebook's report showed a 27.5% year-over year increase in advertising revenue due to new ad tools, including video editing features and customized marketing plans that offer targeting suggestions, Canaccord Genuity's Maria Ripps said. The momentum is likely to continue.

"We think that improving Stories monetization and ongoing strong execution could lead to upside to estimates," the analyst wrote in a note.

KeyBanc Capital Markets' Andy Hargreaves highlighted Facebook's growth opportunities are both "large and widespread." Encouragingly, this will come at a time when Facebook's cost structure moderates which will improve margins and cash flow.

"We believe Facebook retains excellent opportunities to drive growth in the stories formats across Instagram, WhatsApp, and Facebook, from new ad formats, and from the broader rollout of transactional tools," the analyst wrote.

Ad revenue per user accelerated from 16.8% last quarter to 18% in the second quarter with notable strength in Europe where ARPU rose 21.6% as the impact of GDPR started to ease, according to Mizuho's James Lee. ARPU growth in Asia also accelerated by 160 basis points to 15.8% from improved monetization.

Deceleration In Growth

Management indicated its strong second quarter will likely be followed up with deceleration in revenue growth through the end of the year, said Baird's Colin Sebastian. Management's full-year operating expenditure guidance was left unchanged but investors shouldn't necessarily be concerned.

"While we anticipate some challenges from regulatory oversight and product changes, Facebook is adapting quickly (e.g., pivot to commerce/payments) and should be able to maintain above market growth rates," Sebastian wrote.

FTC Takeaways

Facebook's $5 billion fine implies it's the only company being forced to spend billions of dollars to implement internal changes to how it manages privacy, Needham's Laura Martin said. Facebook is now a target of regulators and can no longer compete on an even playing field.

"The fact that the FTC was allowed to put such draconian restrictions on FB implies no-one in Washington was willing to stop them due to a lack of trust in FB," Martin wrote, adding "If FB's brand is tarnished in DC, we think it makes the company a bad business partner for anything that involves regulators."

Privacy In Focus

Privacy related commentary was a key area of focus during Facebook's conference call, Nomura Instinet's Mark Kelly said. Management announced the creation of a new Privacy Committee as part of its board but didn't discuss the financial impact.

"Overall, we think the company's outlook incorporates a fair amount of conservatism as it moves through this transition, and we continue to expect upward revisions this year," Kelly wrote.

Ratings And Price Targets

• Canaccord maintains a Buy rating on Facebook with a price target lifted from $225 to $240.
• KeyBanc maintains at Overweight, price target lifted from $220 to $240.
• Mizuho maintains at Buy, price target lifted from $230 to $247.
• Baird maintains at Outperform, price target lifted from $215 to $230.
• Needham maintains at Hold, no price target.
• Nomura maintains at Buy, price target lifted from $226 to $235.

Facebook's stock traded lower by 2.8% to $198.84 at time of publication.

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