ii view: Facebook shares slapped down by rising costs

A poor response to these results pulled the shares off their all-time high, but is this an opportunity?

Fourth-quarter results to 31 December 2019

• Total revenue up 25% to of $21.1 billion
• Net income up 7% to $7.34 billion
• Earnings per share up 8% to $2.56
• Cash and cash equivalents of $54.86 billion

Chief executive Mark Zuckerberg said:

"We had a good quarter and a strong end to the year as our community and business continue to grow. We remain focused on building services that help people stay connected to those they care about."

ii round-up:

Positives in social media giant Facebook's (NASDAQ:FB) fourth-quarter results were overshadowed by rising costs. 

Sales and earnings both surpassed analyst estimates, but a fall in the operating margin, thanks to increased costs caused by data privacy challenges, worried investors and led to a 7%-plus fall in the share price during after-hours US trading. 

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The operating margin for 2019 as a whole came in at 34%, down from 45% in 2018 and hit by a 51% hike in costs and expenses to $46.71. Staff headcount spiked 26% year-over-year to nearly 45,000 as the company upped its battle to both verify content and secure data privacy. In July, Facebook agreed a government settlement of $5 billion following its Cambridge Analytica scandal. 

For the quarter, daily active users increased 9% to 1.62 billion and monthly active users rose by 8% to 2.5 billion. Adding in users of its other apps such as Instagram, WhatsApp, or Messenger, monthly users rises to 2.89 billion.

Growing optimism regarding the company’s ability to monetise Instagram through video ads and commerce, recently helped the share price to hit an all-time high.

ii view:

Despite data privacy challenges, Facebook as a platform for human interaction looks likes it's here to stay. Plans to create a new digital currency could elevate it further as a staple of daily smartphone usage. Facebook and Alphabet (NASDAQ:GOOGL) continue to dominate the digital advertising market. 

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For investors, a large cash holding and a forward price/earnings (PE) ratio of around 26x, and below the three-year average of over 30, offers some attraction. Facebook provides exposure to global social media that you cannot get access to elsewhere. Of course, a 56% gain in the share price in 2019 generates some caution, and the argument over tech sector valuations rumbles on. But, for now, and despite cost headwinds, Facebook remains the leading social media player, a status investors cannot ignore. 

Positives

• Monthly active users across its apps is approaching 3 billion
• Significant cash balance held
• Planning to launch a digital currency

Negatives

• A series of scandals have hit the company
• Government scrutiny in relation to the big tech companies has increased
• Concerns regarding governance and the future of Mark Zuckerberg as CEO overhang

The average rating of stock market analysts:

Strong buy