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By Ali Mogharabi| 10-31-2018 10:00 AM

Mixed Results for Facebook, Shares Look Cheap

Third-quarter results missed slightly on the top line but beat our expectations and consensus on the bottom line.

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FBFacebook Inc
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Ali Mogharabi: Facebook's third-quarter results came in mixed as they missed slightly on the top line but beat our expectations and consensus on the bottom line. The narrow miss on revenue was mainly due to the user count decline in Europe, which was a result of GDPR.

We note that the firm's total daily and monthly user counts still beat our expectations. In our view, no decline in Facebook's U.S. users was reassuring as it displayed that this wide-moat name's network effect moat source is intact. More importantly, albeit data and content issues that have surrounded the firm this year, advertisers continue to spend on Facebook as ad loads and ad prices both increased and further drove impressive double-digit growth in revenue generated per user.

We expect to see similar monetization in Facebook's newer products such as Instagram and Stories in one to two years. Management's guidance indicated slightly better than expected revenue growth in the fourth quarter while margin for next year may be coming in a bit lower than we had modeled. The two offset one another and did not impact our fair value estimate of Facebook.

We are maintaining our $186 per share fair value estimate. We currently view Facebook shares as attractive as they are trading at a 21% discount to our fair value estimate.

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