ii view: Facebook looks to develop the ‘metaverse’

An online advertising giant with plans to take social media into a virtual world. Buy, sell or hold?

Second-quarter results to 30 June

• Total revenue up 56% to $29.1 billion
• Net income doubled to $10.4 billion
• Earnings per share doubled to $3.61
• Cash and cash equivalents of $64.1 billion

Chief executive Mark Zuckerberg said:

"We had a strong quarter as we continue to help businesses grow and people stay connected. I'm excited to see our major initiatives around creators and community, commerce, and building the next computing platform coming together to start to bring the vision of the metaverse to life." 

ii round-up:

Social media giant Facebook (NASDAQ:FB) reported a strong quarterly performance as companies advertised on its platforms, but warning of slowly growth ahead as it begins to lap tough comparatives.

Earnings doubled and revenues grew by 56%, beating analyst expectations, although recent changes made by Apple Inc (NASDAQ:AAPL) to its software were again highlighted as feeding into expected slowing growth.

Facebook shares fell by more than 4% in after-hours US trading following the results. Its shares for the past year are up around 60%. That compares to more than 75% for rival advertising mammoth and owner of Google, Alphabet. The Nasdaq index is up by 40% over that time. 

Advertising revenues for Facebook rose by 56% to $28.6 billion as corporate demand to reach its users drove a 6% increase year-over-year in ad numbers and a 47% increase in the average price per ad purchased. 

Revenues for its other businesses including its virtual reality gaming Oculus Quest VR headset division rose by a more sedate 36% year-over-year to just under $500 million. 

CEO and founder Mark Zuckerberg outlined Facebook’s plans to develop the metaverse. This he described as “a virtual environment where you can be present with people in digital spaces.” Facebook has put together a team to develop the plan. 

Monthly active users at Facebook rose by 7% year-over-year to 2.9 billion. Daily active users gained by 7% to 1.91 billion.

Like the second quarter, management expects that advertising revenue growth will be driven primarily by year-over-year advertising price increases during the rest of 2021. Analysts have been forecasting revenue growth of around 30% for the current third quarter to the end of September.

Broker Morgan Stanley didn’t expect significant changes in estimates following the results, although it raised its target price to $400 per share from a previous $375 and kept its overweight rating.   

ii view:

Founded in 2004, group apps now include Facebook itself, Instagram, Messenger, and WhatsApp. Facebook’s virtual reality gaming business Oculus Quest sits aside from its core advertising business and for which gamers need to be Facebook members. On a more day-to-day basis, monetisation of its popular Instagram app continues to occupy management. Analysts have previously estimated that Instagram could add $5 billion of incremental ad revenue over 2021.

For investors, changes by Apple, tougher comparatives later this year and a return to reopened store outlets and away from Covid-19 driven home online shopping all need to be considered. Government and regulatory concerns regarding Facebooks influence over such events as elections and misinformation have also not disappeared. 

But these latest results again underline its importance to corporate advertisers. Growing demand and investment at its virtual reality Oculus business and its potential feed into a possible metaverse platform offers excitement. Cash and cash equivalents of $64 billion gives room for ongoing investment. In all, and despite some required caution, Facebook will likely remain popular among long-term investors.

Positives

• Monthly active users across its apps is approaching 3 billion
• Significant cash balance held

Negatives

• A series of scandals have hit the company
• Government scrutiny in relation to the big tech companies has increased

The average rating of stock market analysts:

Strong buy