Facebook Q4 16 – In focus
In the next 3 years, the priority is clearly video and we can see Facebook evolving to become more like YouTube or Netflix.
Facebook reported good results and highlighted that while 2017 would be much slower, video is the current priority to drive the next leg of growth.
Q4 16A revenues / Adj-EPS were $8.81bn / $1.41 nicely ahead of consensus at $8.51bn / $1.31. Mobile was once again the main driver of revenues making up 81% of revenues and growing 61% YoY, echoing the strong numbers reported by Alphabet. Facebook reiterated that growth in 2017 would slow markedly, as it has fully monetised the traffic that it already has, but it is well advanced in seeking other avenues. In the next 3 years, the priority is clearly video and we can see Facebook evolving to become more like YouTube or Netflix. These developments are already underway with the latest innovation being the addition of a tab at the bottom of the Facebook app that has top trending videos as well as recommendations for the user.
This makes Facebook video look far more like YouTube which we see as an encyclopedia of video which Facebook clearly intends to emulate. If Facebook can establish itself as a real rival to YouTube, this will bring its content consumption offering to maturity and we will be comfortable increasing its Digital Live coverage from 36% to 46%. We think that it is still too early to call Facebook a real destination for video, but it is steadily moving in this direction.
In Gaming and Facebook M its efforts are far more nascent and we see these two appearing in Facebook’s 5 year strategic horizon. While the long-term outlook for Facebook remains good in terms of Digital Life coverage, artificial intelligence remains a big concern. Facebook has made some big hires in this area but its algorithms remain basic at best and deliver an awful user experience.
RFM research indicates that almost every time Facebook tries to use intelligent automation, things go badly wrong leaving Facebook having to fall back on humans. While this is not a huge problem today, if Facebook continues to rely on humans to customise the user experience for its users, OPEX will start growing much more quickly than sales. My concern is not that Facebook can’t fix it but that it will take it a very long time, leaving it still behind its rivals who are already miles ahead and investing heavily. This is why we think that Facebook will end up having to make a lot of acquisitions in this space over the next 3 to 5 years.
With a slower outlook for 2017 and the share price back to its all-time high, we can not get excited about the stock as there are challenges that need to be overcome before the next leg of growth materialises. We continue to prefer Microsoft, Tencent and Baidu for capital growth and Apple for income.
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