Facebook (NASDAQ: FB) growth in US and EU has peaked and ad revenue is under competitive pressure

Band Goran Damchevski

This article originally appeared on Simply Wall St News

As you may know, Facebook, Inc. (NASDAQ: FB) just released its latest second quarter results with very strong numbers. When looking at the business, three things come to mind. The “sell high” part of the cliché phrase “buy low, sell high” decreases future growth rates and very high margins.

Let’s open with the margins, because when we look at them, they are quite difficult to understand:

NasdaqGS: EBIT margins for the last twelve months FB

From the graph above we can see that Facebook has returned to profitability over the past two years, this seems to be due to the daily growth of active users globally, an increase in average dollars per user. and general expansion in Asia-Pacific and the rest of the world.

You will also notice that below I start to make some pretty pessimistic points, however I would like to point out that Facebook has impeccable free cash flow and one-off cash outflows when it comes to investing and funding. They prioritize R&D spending, which is exactly what investors would like to see in a tech company : Heavy investments in capital and in research and development. Qualitatively, their advertising platform has improved a lot in terms of functionality and efficiency compared to a year ago, and their global reach has remained in a leading position thanks to contributions from Instagram and WhatsApp.

Now let’s take a look at how Facebook has grown so far and what challenges lie ahead.

fb-daily-active-users NasdaqGS: Daily FB Active Users by Region

The graph above is interesting because it already shows the stagnation of daily user growth in the United States and Europe. You can find these results in their quarterly Q2 report. Facebook’s CFO comments that there could be a bump in the future:

“In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to slow significantly on a sequential basis … iOS updates, which we believe that they will have a greater impact in the third quarter … “

What we can take away is that US and EU revenue will be under pressure as iOS users will have the choice to turn tracking on and off, which should decrease returns. on advertising. It will not be directly impacted per se, it is the ad targeting algorithm that is at risk, and Facebook will have to find a different or alternative heuristic approach to increase ad revenue per user. Especially important are US and EU users, earning US $ 51.5 and US $ 17.2 per user, respectively, compared to a global average of US $ 9.95.

This is part of the reason why the stock is nearing a peak – Yes, there is still a rise, but investors now face a timing issue as the main question starts to be “When?” Rather than “If? “.

Now, let’s take a step back and put the story in context with analysts’ predictions for the future.

Second quarter profits were an overall positive result, with revenues exceeding expectations by 4.2% to reach US $ 29 billion. Facebook also reported a statutory profit of US $ 3.61, 20% more than analysts had expected.

See our latest analysis for Facebook

profit and revenue growth NasdaqGS: FB Earnings and Revenue Growth August 10, 2021

Following the latest results, Facebook’s 45 analysts are now forecasting revenues of US $ 119.2 billion in 2021. This would represent a significant 14% improvement in sales from the past 12 months. Statutory earnings per share are expected to increase 2.9% to US $ 14.09.

Analysts have reconfirmed their price target of US $ 414.

Conclusion

Facebook is and continues to be a high margin cash delivery business. However, the financial market is a forward-looking weighing machine, and the future suggests a possible change in direction.

The business is stable and competently managed. Future challenges involve revising advertising practices, discovering new heuristics or improving the existing algorithm, further growth of the developing world, and maintaining user engagement without sacrificing margins.

For investors who have had a really good run so far, it’s hard to ask for a break, but the past doesn’t dictate, and I’m asking two “common sense” questions:

  • Will the future bring more people to Apple’s iOS? (look at the performance of the new iPhone)
  • When talking to people, do they brag or try to hide their time spent on one of Facebook’s platforms?

The consensus price target remained at US $ 414 as the latest estimates were not sufficient to impact their price targets.

Continuing this reflection, we believe that the long-term outlook of the company is much more relevant than the results of next year. We have forecasts for Facebook through 2023, and you can see them for free on our platform here.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.

Do you have any feedback on this item? Are you worried about the content? Contact us directly. You can also send an email to [email protected]

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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