Analysis: FB GOOGL SNAP TWTR NVDA

Facebook (FB) reported better-than-expected second-quarter results Wednesday after the closing bell. On the top line, total revenue of $29.077 billion (+50% YoY on a constant currency basis -- an acceleration from the first quarter) exceeded the estimate of $27.854 billion. Earnings per share of $3.61 (+101% YoY) crushed estimates of $3.04 per share.

Digging into the top-line number, advertising revenue of $28.580 billion (+56% YoY or 51% ex FX) topped expectations of $27.185 billion. Although the result was much stronger than anticipated, we think the market knew this was coming well in advance after seeing the better-than-anticipated digital advertising numbers from Twitter (TWTR) and Snap (SNAP) last week and Alphabet (GOOGL) yesterday.

Management attributed very strong growth rate to continued strength in product verticals such as e-commerce, retail, and consumer packaged goods. Travel, entertainment, and media showed signs of a recovery in spending, as well.

Pricing trends looked strong in the quarter, as the average price per ad increased 47% YoY, and the number of ad impressions was up 6%, which is a slowdown but Facebook was up against tough comps from last year when engagement soared due to COVID restrictions. Impression growth was driven by developing markets, while pricing was up thanks to strength in advertiser demand.

On a user regional basis, ad revenue growth was strongest in Rest of World (+86% YoY), followed by Europe (+63% YoY), then Asia Pacific (+56% YoY), and the U.S. and Canada (+48% YoY.)

Other revenue came in at $497 million (+36% YoY), a miss against estimates of $686 million. Management said revenue growth from this business continues to be driven by Quest 2 sales. Management also added that the growth slowdown in the second quarter from the first was due to seasonality.

On the expense front, capital expenditures, including principal payments on finance leases, were $4.74 billion, slightly below estimates of $4.872 billion. The headcount grew by 21% YoY to 63,404.

Engagement was strong with Facebook Daily Active Users (DAUs) averaging 1.91 billion (+7% YoY) for June, in line with expectations of 1.908 billion. Facebook Monthly Active Users (MAUs) were 2.90 billion (+7% YoY) as of June 30, in line with expectations for 2.908 billion. The closely tracked DAUs and MAUs held steady at 66%.

During the conference call, CEO Zuckerberg said that more than 3.5 billion people actively use one or more of Facebook's services. For some perspective of how large that number is and how wide of a reach Facebook has, that's about 45% of the current world population.

We also want to point out that Zuckerberg spent a lot of time on the call discussing his plans to build out a metaverse. For those unfamiliar with the topic, Zuckerberg explain the metaverse as following:

"It's a virtual environment. We can be present with people in digital spaces. And you can kind of think about this as an embodied Internet that you're inside of rather than just looking at. And we believe that this is going to be the successor to the mobile Internet. You're going to be able to access the metaverse from all different devices and different levels of fidelity from apps on phones and PCs to immersive virtual and augmented reality devices. Within the metaverse, you're going to be able to hang out, play games with friends, work, create and more. You're basically going to be able to do everything that you can on the Internet today as well as some things that don't make sense on the Internet today, like dancing."

Think of this as the next evolution of internet and social media that Facebook is currently investing billions of dollars on to ensure its leadership in the field. And by the way, Zuckerberg called out Nvidia's (NVDA) graphic chips are one of the key enablers of this type of technology.

Growth in DAUs on a sequential, absolute basis, was led by Asia Pacific (+28 million QoQ, +82 million YoY) followed by rest of world (+5 million QoQ, +35 million YoY), then U.S. and Canada (flat QoQ and -3 million YoY) and Europe (-2 million QoQ, +2 million YoY). Management attributed the sequential decline to seasonal slowness and the ease of restrictions. Engagement metrics in North America are expected to bounce quarter to quarter given the high level of market penetration.

Looking at the company's "Family" metrics, which include Facebook, Instagram, Messenger, and Whatsapp, the "Family Daily Active People" - or DAP - grew 11.7% year-over-year to 2.76 billion. Family Monthly Active People (MAP) also increased 11.7% year-over-year to 3.51 billion. This means DAP/MAP held steady at 79%. And the Family Average Revenue per Person (ARPP) increased roughly 37% YoY to $8.36.

As for how Facebook monetized its products, worldwide Average Revenue per User (ARPU) came in at $10.12 (+43.5% YoY), topping expectations of $9.64. By geography, U.S. and Canada ARPU was $53.01 (+45.2% YoY); Europe came in at $17.23 (+56.2% YoY); Asia-Pacific was $4.16 (+39.1% YoY); and the rest of the world was $3.05 (+71% YoY).

On the capital allocation front, Facebook repurchased $7.1 billion of stock in the quarter. That's $3 billion more than what the company repurchased in the first quarter. Facebook also generated $8.5 billion of free cash flow, beating estimates of $6.4 billion. The company ended the quarter with $64.1 billion in cash and cash equivalents and marketable securities.

Outlook

CFO David Wehner on the release updated the company's outlook for the rest of the year. In the third and fourth quarters, Wehner said, revenue growth rate is expected to decelerate "significantly" on a sequential basis as it laps periods of increasingly strong growth. This guidance is consistent with prior commentary. When viewing Facebook's expected growth rate on a two-year basis (to exclude the lapping effects of the COVID-19 recovery) Wehner said it expects year-over-two-year total revenue growth to decelerate modestly in the second half of 2021 compared to the second quarter growth rate. This could be a reason why we are seeing some selling pressure in the stock after hours.

Factored into this outlook are "increased" ad targeting headwinds related to regulatory and platform changes, most notably from Apple's new iOS update, which will have a greater impact in the third quarter compared to the second. Importantly, Wehner said on the call that the impact from the iOS changes has been in line with company expectations thus far.

Management is also monitoring uncertainty related to the viability of transatlantic data transfers and the potential impact on its European operations. This is not new from prior commentary.

On the expense side, management reaffirmed its total expense outlook of $70 billion to $73 billion. In addition, management continues to anticipate capital expenditures in the range of $19 billion to $21 billion this year.

Bottom Line

Overall, Facebook's better-than-expected result is being met with a "sell the news reaction" on Wednesday night as some investors are taking caution in management's revenue growth outlook. We are willing to give FB the benefit of the doubt considering how conservative management has become with their forecasts.

Shares are trading about 3.5% lower to $360 in after-hours trading, but let's remember that the stock hit a new high earlier in today's session as traders bid up the stock price in anticipation of strong results following Twitter, Snap, and Alphabet's blowout results. Also, the $360 level is still higher than where the stock traded last Thursday, so in the grand scheme of things this overnight pullback really is not that big of an issue. 

Action AlertsPLUS, which Cramer co-manages as a charitable trust, is long FB, NDVA and GOOGL.