FACEBOOK: FUNDAMENTAL ANALYSIS+PRICE ACTION & NEXT TARGET|LONG🔔Facebook beat Wall Street analysts' expectations in its second-quarter earnings report.
Revenue rose 56% year-over-year to $29.1 billion, beating analysts' forecasts, and earnings per share doubled from the quarter that suffered a lockdown a year ago to $3.61, beating the consensus forecast of $3.02.
Despite that strong performance, Facebook's stock price fell 4 percent as the company's growth lagged behind that of Google's parent company Alphabet, and the company said it expects earnings growth to slow significantly in the second half of the year.
But the second-quarter results weren't just indicative of the underlying numbers.
Facebook CFO Dave Wehner recently warned investors of an impending slowdown in the company's revenue growth in the second half of 2021. After reporting impressive growth in advertising revenue compared to the second quarter of last year, Wehner reminded investors that April and June of last year were very volatile times for marketers who cut back on advertising spending. As we enter the second half of the year, comparable periods from 2020 will be much more difficult, and revenue growth will slow.
That's why investors shouldn't be too concerned about Wehner's comments.
Looking back to 2020 and the first half of 2021, investors can get a better idea of where Facebook is headed.
In the second quarter of last year, Facebook's ad impressions were up 40%, while average ad prices were down 28%. Naturally, this presents a difficult comparison for ad impressions growth, but it's easy to use the previous year's numbers to compare ad prices. Indeed, Facebook's ad impressions grew only 6% in the second quarter, but ad prices jumped 47%.
Facebook | Fundamental Analysis
As you can see, ad prices remained relatively low during the second half of the year. While this is still better than the average decline in ad prices in the first and second quarters of 2020, the growth was not what investors are used to. At the same time, growth in ad impressions declined on the back of improved pricing.
In his forecast, Wehner virtually eliminated the variable of ad impression growth from the revenue growth equation. He said he believes that the rise in the COVID-19 pandemic, which has been particularly pronounced in the high-margin region of North America, poses a challenge to 2021's attraction growth. In addition, the growing shift from feeds to video products such as Stories, Reels, and Facebook Watch will lead to a decline in impressions.
Even if we exclude the growth in ad impressions from revenue growth projections, ad prices should still increase markedly in the second half of the year due to strong demand from marketers. One need only look at the revenue projections of Facebook's competitors to get an idea of demand in the third quarter. According to Twitter, the company expects revenue growth of 30% on average, and Snap, in turn, expects revenue growth of 58-60%.
Nevertheless, Facebook should be able to increase the number of ad impressions. First, the company continues to increase the number of daily active users by 7% and 12% on Facebook and the entire family of apps, respectively. Second, the company is increasing ad downloads in its video products, such as Reels, which account for a significant amount of engagement on Instagram. Reels is still in the very early stages of monetization, but it is growing rapidly. This factor, combined with the growth in users, makes modest growth in impressions possible.
With continued strong demand for digital advertising and modest growth in the number of impressions, FAANG share ad revenue should continue to grow at a pre-pandemic pace in the upper 20% range. Yes, this is a slowdown from the first half of the year, but it is still very strong growth for a company of this site like Facebook.
