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Social Media and FANG giant Facebook was issued with a note from Barclays on Thursday Updating their " Price vs. Volume Drivers" note following FB's earnings last month. The report was instructive in explaining both the advertising drivers and duplicate accounts.

Facebook Revenue Per User

What stood out to me immediately was the beginning of the note titled "Why We Think FB Can Modestly Beat 2018 Consensus". The note begins with "We now estimate core "real" Facebook user growth is currently 10% Y/Y after stripping out duplicate & false accounts and backing out Messenger, in contrast to the 15% overall disclosed figure exiting 2017, and down from 17% in 2016."

So this are big changes on user growth for a stock that is at $185 off a $195 all time high in a market that has seen a few jitters lately remember when the Nasdaq was recently rocked, no I guess the market doesn't. So I was anxious to see the rational of being overweight and bullish the stock. Are we even further along trying to ignore or risk and justify the means? Perhaps we need to understand pricing and volumes of advertising better? Insstructive reading as I said earlier.

Barclays Stock Rating Overweight

  • Industry View Positive
  • Price Target USD 225.00
  • Price (07 Mar 2018) USD 183.71
  • EPS FY1 (E) 7.23 EPS FY2 (E) 8.18
  • Market Cap (USD bn) 533.6777

From Barclay's Note - I will let you decide:

This deceleration in real user growth, along with management commentary about ad load reaching its natural ceiling in 2H17, plus the impact of video in newsfeed, explains why impressions are only growing 4% and should stay mid-single digits in 2018. Last quarter we took a granular view of the history of FB's ad trajectory, breaking down the price vs. volume trends over the past few years (see: Unpacking Facebook Price vs. Volume, 11/28/17), and we are updating our framework for new disclosures.

Stepping back, we think FB shares are in a consolidation period from the heightened regulatory and society noise, and we'd take advantage and accumulate on weakness. The temporary narrative is focused on fixing problems and impact to engagement, and will likely shift back to growth initiatives at some point, at which point FB's multiple is likely to expand again from today's 20.4x FY19 consensus GAAP EPS.

Is Single-Digit Impression Growth A Problem? Not Really, Price Has Room To Run Impression growth in 2018 (our estimate now +5%, down from 15% previously) is going to increasingly be driven by IG & Messenger, while core newsfeed decelerates. Consensus estimates bake in ~29% price inflation for FB in 2018 (ex- fx), which we think is beatable considering what FB posted in 2H17.

The first stage of price inflation is where FB can drive higher yield (eCPM) by optimizing which ads it shows to which users, while keeping advertiser ROI stable. FB is investing aggressively in machine learning to improve ad ranking & relevance. This could last several quarters, if not years. Once relevancy improvements are tapped out, FB should be in a position to increase unit price, which will erode advertiser ROI to some degree but is likely to be sustained given FB's volume advantage vs. other mobile display channels. 

A lot ifs and buts there but is relevant to keep an eye on any new competitors we havent heard of yet or existing valuations for $SNAP and $TWTR.

Source: Barclays

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