• Facebook shares are up ~11% after hours as the company showed users and advertisers have not gone anywhere despite 2018’s privacy backlash.
• Strong average revenue per user (ARPU) growth shows Facebook is getting better at monetizing its massive user base across more geographic areas.
• We are cautiously optimistic in Facebook’s ability to ensure a smooth transition in engagement and ad spend from Feed towards Stories.
• Facebook’s revenue growth of 30% is its slowest yet but is still impressive for a company 7 years out from its IPO.
• Major untapped opportunities remain in its messaging business and new experiences on the way but have longer-term outlook.

Back to Business

After nearly a year of safety and security PR nightmares, Facebook proved to investors that more people than ever still use Facebook’s platforms regularly and advertisers have few better alternatives for ROI on their marketing budget. Facebook has the audience, the data, and the breadth of ad inventory throughout its family of apps. When asked if he noticed any negative effect on user growth/engagement due to bad press last quarter, Facebook CFO David Wehner replied, “I’d probably just let the numbers speak for themselves.” However, it was also mentioned on the call how the company will be phasing out Facebook Blue specific metrics as its growth slows.

Stories

Last quarter, Zuckerberg said Stories, the disappearing image and video posts that Facebook famously copied from Snapchat, would become “a bigger medium than Feed has been.” This sent the stock down sharply as Stories currently bring is less revenue per ad than newsfeeds. This quarter, the tone surrounding Stories was a little more positive as metrics such as Instagram passing 500 million daily active Stories users and 2 million of Facebook’s 7 million active advertisers are using the new Stories ad format. We expect Stories pricing to improve for Facebook once demand increases as more advertisers adopt the new ad format. In the near-term, however, the shift towards Stories represents a key factor in revenue growth rates decelerating in 2019.

Growth Opportunities Ahead

With so much negativity baked into the Facebook stock, it was refreshing for investors to hear about the ways Zuckerberg is exploring new growth opportunities. There were four key takeaways in this update:

1. Zuckerberg expects Facebook Watch to have a breakout year
2. Instagram commerce and shopping experiences are coming
3. Oculus Quest’s potential to take VR mainstream in Spring 2019
4. Facebook Portal exceeded internal expectations

But perhaps the biggest opportunity on the horizon is Facebook’s efforts to monetize WhatsApp and Messenger, each boasting over 1 billion users. Analysts probed into specifics of when progress can be expected, especially given last week’s news that WhatsApp and Messenger are integrating with Instagram’s messaging platform. However, COO Sheryl Sandberg, who doesn’t appear to be going anywhere, stressed how the company is still focused more on user growth and retention. This is due to the fact the company is moving cautiously across an unprecedented path towards monetization as a messaging platform doesn’t work nearly the same as Facebook Blue or Instagram does.

Status Update

To conclude the earnings call, Zuckerberg said that 2017 and 2018 were about defining the company roadmap whereas 2019 has a clearer strategy to continue implementing. Those priorities are:

1. Progress on social issues
2. Making improvements to people’s lives with new experiences
3. Strong business execution
4. Communicate more transparently

There are inevitably more PR nightmares on the way for Facebook, but the company is investing heavily, at the expense of short-term margins, to ensure its platforms that bring out the best and worst of humanity can have a net positive impact on the world for a long time.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.