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Jul 27, 2017

Facebook reports Q2 profit jump as video push drives mobile ads

Facebook's latest active user numbers show continuing gains in engagement: CFRA

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Shares of Facebook Inc (FB.O) touched a record high on Thursday on the back of overwhelmingly positive quarterly results, adding more than US$27 billion to its market value.

The world's biggest online social network posted a 71 per cent surge in second-quarter profit and a 50 per cent jump in mobile ad sales, allaying investor concerns that ad revenue growth was peaking as it runs out of space to display ads.

Shares rose 6 per cent to US$175 in early trading, adding gains worth twice the market capitalization of rival Twitter Inc (TWTR.N).

Facebook's stock slipped as much as 2 per cent on May 4, a day after the company posted first-quarter results and said ad revenue growth was expected to come down significantly over the rest of 2017.

Ad sales growth did slow to 47 per cent in the June quarter, after a 51 per cent increase in the March quarter, but investors brushed it aside, looking ahead to new growth drivers - WhatsApp, Messenger and video.

At least eleven brokerages raised their price targets. Wedbush was the most bullish, lifting its target by US$40 to US$225. The median price target is US$190.

"The strength of Facebook's mind-boggling results continued to be a testament to the platform's massive user base and unparalleled targeting abilities," MoffettNathanson Research analyst Michael Nathanson said.

Facebook has more than 2 billion regular users. Its two messaging services, Messenger and WhatsApp, have more than 1 billion users each.

Mobile advertising accounted for 87 per cent of the US$9.16 billion in total ad revenue even as the average growth in ad price jumped 24 per cent to a record high.

Advertisers will continue to buy ads despite an increase in prices given Facebook's superior return on investment compared with other digital platforms, Credit Suisse analyst Stephen Ju said.

Facebook also cut its forecast for expense growth even as it said it was moving to diversify its revenue stream by investing in initiatives such as video and TV-style programming.

Chief Executive Mark Zuckerberg said he expected video to become the "primary driver" of revenue over the next few years.

Lack of details, however, left analysts cautious about the company's video efforts, which would have to compete with Alphabet Inc's (GOOGL.O) YouTube and Netflix Inc (NFLX.O).

"The biggest open-ended questions will be how successfully Facebook can monetize its video-only tab and TV extension product," MoffettNathanson's Nathanson said.