Morningstar equity analysts think Facebook’s first-quarter results, which showed a rise in active users and revenue, provide some support for the view that the firm can regain user trust and weather the Cambridge Analytica and overall data privacy issues it is currently facing. We believe Facebook is likely to endure the short-term impact of the scandal, and we do not expect a significant long-term headwind to Facebook's platform, operations, or Morningstar rating.
Based on Facebook’s first-quarter results and management guidance, we slightly adjusted our revenue growth assumption upward, but this did not affect our $198 per share fair value estimate for the firm. We still see about 17% upside in Facebook’s shares and believe investors have been presented with an attractive margin of safety.
Ad Revenue Up 50%
First-quarter total revenue of nearly $12 billion was up 49% year over year. Facebook’s ad revenue rose 50% on ast year to $11.8 billion, driven by 13% year-on-year growth in monthly average users, accompanied by a 31% increase in average revenue per user, or ARPU.
While Facebook was already planning to make such investments in video this year, the Cambridge Analytica data scandal has further prioritised those investments. With growth in video content, it appears that Facebook will also build new data centres that will drive the firm’s capital expenditure up to the high end of the $14 billion-$15 billion range to which it guided last quarter.
While we still believe that the impact of the Cambridge data issue will linger on and create pressure on the firm’s user growth the next few quarters, we were pleased with Facebook’s monthly average user and daily average user counts.
In our view, given that Facebook owns the two most valuable social-networking properties, any migration of users or usage away from Facebook may simply shift toward the company's Instagram platform. Unlike the Facebook platform, we see room for additional Instagram ad loads per user to accommodate the increasing number of advertisers on the platform, raising Instagram's ARPU. We foresee Instagram's revenue growing at a faster pace than Facebook