Facebook: No Stopping This Juggernaut

| About: Facebook (FB)


FB's Q2 underscores my bullish view on the stock that the company remains the best idea in the internet and media space, with multiple drivers as its med-term catalyst.

Near-term initiatives to drive FB's value proposition, which should continue to attract advertisers onto its platform and improve user monetization.

Increasing product expansion in live video streaming and search suggests growing competitive risk to GOOG and AMZN.

Facebook's (NASDAQ:FB) Q2 underscores my bullish view that the company remains the best growth story within the internet and media space, and gives investors the best exposure to mobile advertising, social media, VR and video. I continue to consider FB to be a long-term holding for any investor who is looking to gain exposure to all the key internet themes, namely mobile ads, VR, digital media, mobile messenger and potentially into new areas such as financial services, artificial intelligence and other moonshots. Bottom line is that as long as users are growing, engagement remains strong and innovation continues, then FB will find a way to monetize and market different products to its users. Although comps will increase in the coming quarters, keep in mind that there are still plenty of projects that FB can scale; each of them could potentially be as big as FB's existing social networking business. I remain bullish on the stock and at 25x 2017E earnings, the company trades at a discount relative to its growth outlook.

Revenue of $6.44b easily beat consensus of $6.01b while EPS of $0.97 was also ahead by $0.15, driven by a +9% increase in average price per ad and +49% growth in ad impression, suggesting that FB remains a premier advertising platform that continues to attract advertisers given its superior ad product. Remarkably, MAU of 1.71b (+15% y/y) beat expectations of 1.69b while DAU of 1.13 was in line, implying an engagement level of 66%, consistent with the prior quarters. The overall engagement level appears to hit a plateau with both PC and mobile equally engaged, but I believe that over time engagement will pick up on the mobile side, as FB enhances its mobile properties such as the messenger and Instagram which I believe could lift the overall MAU. Worth noting that mobile DAUs growth has been strong at +22% this most recent quarter, and I believe that is a good indicator of FB's mobile engagement profile. However, investors should be mindful that FB's user growth in North America and Europe will continue to stagnate so much of the engagement and user growth will have to come from Asia and rest of the world. Although parts of these regions will likely sustain growth, the lack of presence in China paints a tough outlook for the social networking segment, which underscores my view that FB's non-social media segment will become increasingly important going forward.

The initiatives FB outlined regarding the shift to mobile, growing the number of marketers and improving the effectiveness of the ad, appear reasonable. Mobile video ads will certainly improve FB's pricing power in the near term and drive engagement across its mobile platform. In addition, having a superior mobile video ad product allows FB to pursue an omnichannel strategy where brands can advertise across its digital properties. Growing the number of businesses on FB's platform is also critical. Note that FB remains underpenetrated amongst the SMEs, a demographic that I think could drive meaningful revenue upside by leveraging the numbers despite their smaller ad budget. The 60m business users are quite impressive and I believe that this number will grow over time as FB improves its ad effectiveness and relevancy similar to how it was able to deliver relevancy over PC in its earlier days.

Finally, several initiatives suggest that FB is increasingly encroaching into rivals' territories by leveraging its existing user base. Video streaming will be an important part of FB's long-term picture and commentaries by the management suggest that FB will continue to invest in this segment and will compete directly against Twitter (NYSE:TWTR), YouTube (NASDAQ:GOOG) (NASDAQ:GOOGL) and potentially Amazon's (NASDAQ:AMZN) Twitch. Equally interesting is the progress made within Search, which allows people to search for topics across trillions of posts on FB. GOOG investors should not overlook this initiative given that the better FB Search becomes, the more users are willing to rely on the FB platform for commonly sought queries and this could potentially steal search shares away from GOOG.

Bottom Line: FB remains the best idea among the large cap internet names with multiple drivers in the medium term. I remain bullish on the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.