Facebook's stock rose +9% after hours after another strong quarter across all core growth metrics.
This growth defied many of the bears who believed Facebook couldn't make significant investments in safety & security and continue to grow rapidly. But as COO Sheryl Sandberg put it on the Q1 earnings call, "we can do both."
Amid a constant stream of negative headlines throughout 2018, Facebook has managed to not only stay afloat but also to continue thriving with record revenue, user, and profit numbers.
Instagram continues to grow at a rapid clip, even as the core Facebook app's business slows. And beyond Instagram, the company is adapting its advertising model to the relatively new Stories format across its various apps, with strong early signs.
The company did take a $3 billion legal charge in Q1 for an FTC violation on privacy, as we explain below. However, excluding that charge (which many investors are doing), Facebook would have easily topped earnings estimates, which could explain the +9% after-hours move in the stock.
In Q1, monthly active users grew to 2.38 billion (up +8% from last year) and daily active users grew to 1.56 billion (also up +8%)
Average revenue per user grew +16% from last year, proving Facebook continues to monetize users successfully
Profits on the other hand, were a bit messy due to a $3 billion fine to the FTC, as explained below
FTC Fine for Privacy Violation
Facebook set aside roughly $3 billion in Q1 to cover a potential fine from the Federal Trade Commission for violating a 2011 consent decree on user privacy
This is potentially the largest fine ever by the FTC, and any settlement could impact the ways advertisers can use the platform in the future
Advertisers are the folks who pay revenue to Facebook, hence the FTC's ruling could affect the business model in a big way
How Facebook is Growing: The Stories Transition
We think it's being driven by the transition to the Stories ad format, in which images and videos appear for only a finite period of time
This ad format became popular on Instagram, and Facebook shrewdly pivoted its advertising model around this format a few years ago
Initially, many investors doubted that advertisers would be willing to adopt the Stories format without heavily discounted ad prices
Our thesis has been the opposite: we believe Stories are the most user-friendly format, and advertisers will follow the users and pay higher prices for Stories ads because they're more engaging for users (thus higher ROI for advertisers)
Advertisers are still in the early innings of adopting Stories, but ad impressions (the number of Stories ads shown) are growing rapidly
Long story short: Facebook is taking what has worked on Instagram and rolling it out across the Facebook family. So far, so good.
The Path Forward
We don't think the privacy concerns are fully resolved, and neither is the FTC matter
However, Facebook is investing billions of dollars into safety & security measures to mitigate future malfeasance, which we believe is the right move
We believe Facebook is proving it can still grow users, revenue, and earnings at an attractive rate despite the security investments
As Facebook drives growth across its family of apps (led by the Stories format), we think it will widen its network effects-driven moat and reward shareholders over time.