Boosting Facebook’s Fair Value

The firm's leadership in social networking and online ad markets were reaffirmed with healthy gains in monthly average users, or MAUs, and average revenue per user, or ARPU.

While these validate our wide moat rating on Facebook, the firm needs to continue to invest in innovation to further differentiate itself from competitors such as Snap Inc. For this reason, management reiterated that Facebook's operating expenses and capital expenditures will increase significantly in 2017, and expense growth likely will outpace revenue growth, resulting in some margin compression in the near term, in line with our prior expectations.

After taking into account Facebook's better-than-expected near-term results, return on the firm’s increased 2017 investments, and time value of money (as we roll our model forward), we will increase our fair value estimate to $135 per share, from $127. We view Facebook shares as fairly valued.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.