Facebook Poised For Long-Term Success Despite Near-Term Concerns

Shares of Facebook Inc FB slipped 5.5 percent in the pre-market hours, despite reporting better-than-expected third-quarter results, as investors weigh forward commentary. However, UBS is positive on the company's long-term fundamentals.

The social media giant reported non-GAAP earnings of $1.09 a share on revenue of $7 billion, which topped Street view of $0.97 on revenue of $6.92 billion. The company delivered 59 percent growth in ad revenues and showed meaningful margin beat.

Daily active users (DAUs) rose 17 percent to 1.18 billion on average, while monthly active users (MAUs) advanced 16 percent to 1.79 billion. Mobile DAUs increased 22 percent to 1.09 billion on average and mobile MAUs came in at 1.66 billion, an increase of 20 percent year-over-year.

“However, mgmt commentary on both forward revenue trends & future investment cadence left investors with open questions on 2017 that are unlikely to be resolved over the near-term,” UBS analyst Eric Sheridan wrote in a note.

Sheridan pointed out that 2017 is likely to be an “aggressive investment year," both in terms of hiring and data centers. The analyst is also negative on larger than expected drop in North America ad revs (670bps vs. UBS est. 400bps) and lower than expected Payments revenues despite Oculus launch.

However, Sheridan maintains his Buy rating on the stock saying Facebook is key long term holding given strong user growth, stable engagement levels and solid ad products.

As such, the analyst upped his fourth quarter EPS/revenue estimate to $1.26/$8.28 billion (from $1.23/$8.24 billion) and FY16 estimates to $4.09/$27.11 billion (from $3.95/$26.98 billion).

That said, the analyst cut the price target by $5 to $150, while the shares ended Wednesday’s trading at $127.17. In the pre-market hours Thursday, they fell 5.50 percent to $120.18.