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In Spite of an Earnings Relief Rally, Challenges at Facebook Remain

By Danny Vena – Updated Apr 9, 2019 at 3:44PM

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Growth didn't slow as much as many feared -- but that doesn't solve the problem.

Expectations were muted going into its fourth-quarter financial report, but Facebook (META -0.74%) continues to defy detractors. While many (myself included) were concerned that the company's revenue growth would continue its rapid deceleration, the results were better than even Facebook had forecast, giving investors a shot of optimism and sending the stock up more than 10% the day following its earnings release. Let's take a look at the results and see what got shareholders all giddy.

Facebook reported revenue that grew to $16.91 billion, up 30% year over year. While growth was down sequentially, it wasn't as bad as the mid- to high-single-digit decline that management had forecast. Revenue was also comfortably above analysts' consensus estimates of $16.4 billion. For perspective, the 30% growth was down from the year-over-year increases of 50%, 42%, and 33% that Facebook reported in the first, second, and third quarters, respectively.

Facebook CEO Mark Zuckerberg holding a microphone and speaking to an audience.

Facebook CEO Mark Zuckerberg. Image source: Facebook.

Diluted earnings per share clocked in at $2.38, up 65% compared to the prior-year quarter, but that requires some explanation. In Q4 2017, changes to U.S. tax law resulted in a one-time charge that reduced earnings per share by $0.77. Without that adjustment, earnings per share would have increased by about 8%.

It wasn't all bad

Mobile advertising revenue continued to provide a growing chunk of Facebook's ad sales, growing to $15.5 billion, up 36% year over year, and now accounting for about 93% of advertising revenue. The average price per ad declined by 2% year over year, the result of a mix shift in products and countries that monetize at a lower rate. Ad impressions on the platform increased 34%, driven by an increasing number of ads on Instagram, including both feed and Stories, as well as Facebook's News Feed. The average revenue per user jumped to $7.37, up 19% year over year.

True to Facebook's word, spending grew as the company continued to invest in infrastructure, and safety and security. The company is working to develop new ways to safeguard its platform from outside interference. Expenses grew to $9.1 billion, up 62% year over year and near the low end of the company's forecast.

Muted growth continued as Facebook's monthly active users (MAUs) climbed to 2.32 billion, while daily active users (DAUs) grew to 1.52 billion, up 9% and 8.7%, respectively, compared with the prior-year quarter. User growth in Europe resumed after two consecutive quarters of declines. About 2.7 billion people worldwide used one of Facebook's family of applications -- Facebook, Instagram, Messenger, or WhatsApp -- at least once during the quarter, and more than 2 billion were active daily.

"Our community and business continue to grow," said Mark Zuckerberg, Facebook founder and CEO. "We've fundamentally changed how we run our company to focus on the biggest social issues, and we're investing more to build new and inspiring ways for people to connect."

A look ahead

Similar to last quarter, Facebook provided only broad strokes as to what investors can expect for the coming quarter. The company expects revenue growth to decelerate by a mid-single-digit percentage compared to Q4, excluding the impact of changing exchange rates. Management also expects revenue growth rates to continue to decelerate sequentially throughout 2019 on a constant currency basis.

Check out the latest Facebook earnings call transcript.

Despite the relief rally that followed Facebook's earnings report, it's important to keep the bigger picture in mind. Revenue growth is slowing, currently 30% year over year, but expected to slow continually throughout the year. At the same time, spending is growing much more quickly than revenue, currently up 62% year over year and expected to be up another 40% to 50% this year, according to Facebook.

This is a recipe for margin compression, as operating margins have already declined to 46%, down from 57% this time last year. The company was still able to increase its bottom line this year as the result of a one-time charge in 2017, and lower tax rates in 2018. Eventually, Facebook will have to accelerate revenue growth, cut back on spending, or both.

For now, however, things were not as bad as many feared, and investors seem content to take what they can get.

Danny Vena owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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