Analysts Parse Facebook's Growth, Revenue Trends After Mixed Q3 Print

Facebook Inc. FB were trading up Wednesday after reporting a mixed third quarter after the close Tuesday.

The Analysts

• KeyBanc Capital Markets analyst Andy Hargreaves reiterated an Overweight rating on Facebook and lowered the price target from $215 to $195.
• Morgan Stanley analyst Brian Nowak reiterated an Overweight rating and lowered the price target from $175 to $170.
• Jefferies analyst Brent Thill reiterated a Buy rating and $200 price target.
• Deutsche Bank analyst Lloyd Walmsley reiterated a Buy rating and increased the target price from $192 to $195.
• Bank of America Merrill Lynch analyst Justin Post reiterated a Buy rating with a price target of $190.

Quarter Highlights

Key takeaways from the quarter include positive net engagement from stories; Zuckerberg’s guidance for improved margin stabilization after 2019; and the improved Q4 revenue outlook combined with a comfort with Street models, said Deutsche Bank's Walmsley.

Morgan Stanley's Nowak said the Q3 print shows how Facebook's engagement continues to shift toward lower-monetizing interactions such as Stories, messaging, Instagram Explore and video. 

Tigress Financial's Feinseth said the report was not as bad as expected.

"I continue to believe that any weakness in Facebook is a buying opportunity, as Facebook has many growth drivers, including the monetization of Messenger and Instagram, along with the ongoing development of artificial intelligence, and AR/VR applications." 

Growth

KeyBanc's Hargreaves considers Facebook's growth opportunities to be strong.

“Facebook’s 2019 expense growth guidance exceeded our expectation, but is now known. Beyond 2019, cost growth should moderate substantially, while the company’s efforts in Stories and video are driving incremental engagement that should lead to monetization. These can help unlock brand ad budgets globally, which, along with marketplace and messaging monetization, should sustain solid top-line growth for several years," the analyst said. 

BofA's Post said the earnings call highlighted increased visibility on open-ended revenue deceleration and margin declines. 

“On this call, management indicated usage is stable in developed markets (and growing quickly across the family of apps), that there are green shoots for monetization in Stories (which could monetize like news feed long-term) and Messenger and that the biggest change to margin structure would be 2019, and then moderation from there." 

Growth could stabilize and begin reaccelerating in 2019, according to BofA. 

Revenue

While Facebook has "increased revenue uncertainty," Morgan Stanley's Nowak named two reasons to remain positive: 

• The company’s ability to innovate and incite both engagement and monetization.
• The consistency in the entire ecosystem in determining how to best monetize emerging forms of engagement.

“Said another way, we see this as more of a temporary transition — that admittedly is likely to take multiple quarters — rather than a permanent impairment.”

Instagram

The social media platform continues to offer upside going into 2019, said Jefferies' Thill.

“Instagram engagement continues to be undermonetized, as it is still early days in terms of driving advertiser adoption in Stories, and other products (Explore, Shopping, etc.) are not monetized." 

Related Links:

Facebook Misses Q3 Sales Estimates, But Users Continue To Grow

A Historical Look At How Facebook Shares Trade After Earnings