Investors Worried About Facebook's Margins Are Missing The Point

Facebook Inc FB once again showed why it is the No. 1 social network by reporting a fourth-quarter beat on both top and bottom line, fueled by massive growth in user base that in turn boosted ad revenues and pricing.

Print's Summary

Here are the key highlights of the Q4 print:

• Q4 EPS at $1.41, beating consensus by $0.10.
• Q4 revenues came in at $8.629 billion, beating by $118 million.
• Ad revenues up 54 percent ex-FX to $8.6 billion, above consensus of $8.3 billion.
• December daily active users of 1.23 billion, up 18 percent.
• Mobile daily active users of 1.15 billion, up 23 percent.

But, bears may point to potential margin headwinds from higher investments this year, both on opex as well as capex front.

The Year Ahead

Fiscal 2017 will be another investment-heavy year for Facebook, which is spending aggressively on key initiatives such as video, product development, Instagram, AI/machine learning and Messenger/WhatsApp.

On the call, Facebook guided for FY 2017 non-GAAP expense growth of 45–55 percent year-over-year, reflecting higher levels of R&D headcount, content and marketing.

Facebook also expects capex to grow 55–67 percent to a range of $7 billion–$7.5 billion, as it plans to spend more dollars on data center/office build-outs.

But, Colin Sebastian of Baird views this positively as these investments lays a strong platform for future growth drivers of the company.

Analyst Commentary

“While these investments will pressure near-term margins/cash flow, we view them as instrumental in setting the stage for further user engagement/monetization,” Sebastian wrote in a note.

Sebastian recalled that FY 2016 expense growth of 40.6 percent was well-below management's original target of 45–55 percent, and believe the initial FY 2017 guidance range could prove conservative.

On the flip side, the company still expects a "meaningful" deceleration in revenue growth due to ad load constraints beginning mid-year. However, the analyst says ad pricing (demand) and engagement (click-through rate) may be able to offset slowing ad load growth.

Sebastian reiterated his Outperform rating, but raised his price target by $8 to $163.

At last check, shares of Facebook were down 0.82 percent to $132.14.