ii view: Facebook profit grows 52% but still cautious

A suite of apps used by billions makes this social media giant tough to ignore. Buy, sell or hold?

Fourth-quarter results to 31 December

• Total revenue up 33% to $28.1 billion
• Net income up 53% to $11.2 billion
• Earnings per share up 52% to $3.88
• Cash and cash equivalents of $61.95 billion

Chief executive Mark Zuckerberg said:

"We had a strong end to the year as people and businesses continued to use our services during these challenging times. I'm excited about our product roadmap for 2021 as we build new and meaningful ways to create economic opportunity, build community and help people just have fun."

ii round-up:

Social media giant Facebook (NASDAQ:FB) delivered forecast-beating revenues and earnings, but offered a cautious outlook given pending changes to Apple’s iPhone operating software and its potential to reduce targeted advertising. 

Fourth-quarter revenue jumped by a third year-over-year to $28.1 billion, exceeding Wall Street forecasts for nearer $26 billion, buoyed by advertising click throughs as consumers continued to shop from home under the pandemic.  

Facebook shares drifted marginally lower in after-hours US trading following the results. Its shares over the last year are up by nearly a fifth. Shares for Apple (NASDAQ:AAPL) are up by more than 65% over the same period and fellow tech advertising giant Alphabet (NASDAQ:GOOGL) is up by just over a quarter. 

Facebook global monthly users climbed 12% year-over-year to 2.8 billion. Daily active users gained by 11% to 1.84 billion. 

Advertising still accounts for around 98% of all Facebook revenues, but sales from its other virtual reality gaming Oculus Quest headset are growing rapidly. 'Other revenues' as marked out by the company grew by 72% to nearly $1.8 billion over 2020, compared to advertising at up 21% to $84.17 billion. 

Staff numbers year-over-year rose by 30% to a little over 58,600 as the company continued to battle any misinformation across its platform. And Facebook remains in the regulatory spotlight, with attention magnified following the storming of government in Washington by protesters in early January. 

Accompanying management outlook comments point to “significant uncertainty” in 2021 as it manages through a number of cross currents. Changes by Apple and potentially reduced online shopping under pandemic restrictions, plus a rollout of vaccines, are possible headwinds. 

A further $25 billion was recently added to its $34 billion share buyback pot. Cash and cash equivalents over the year reached nearly $62 billion. Total expenses for 2021 are expected to be in the range of $68 to $73 billion, unchanged from its previous estimate. 

ii view:

Group apps include Facebook, Instagram, Messenger, and WhatsApp. FB and Alphabet Google continue to dominate the digital advertising market at the expense of more traditional players over recent years such as WPP (LSE:WPP). Recent Facebook innovations include Facebook Pay and Facebook Shops, designed to enable consumers to purchase goods via its adverts but without leaving its apps. 

Facebook’s virtual reality gaming business Oculus Quest sits aside from its core advertising business and for which gamers need to be Facebook members. This adds an arm for it to grow its communities. On a more day-to-day basis, monetisation of its popular Instagram app continues to occupy management. Broker Morgan Stanley estimates that Instagram could add $5 billion of incremental ad revenue over 2021.

For investors, regulatory concerns and ongoing interest by governments around the world in its influence and workings cannot be ignored. Cautious outlook comments and the ability for Apple to influence its advertising targeting also need to be considered. There's also the continued debate over tech valuations. But for around 10 million advertising customers, Facebook remains core when looking to target particular social groups. Despite the ongoing overhang of increased government regulation, a consensus broker target of around $320 per share suggests there could still be more upside long term. 

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