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The Ratings Game: Instagram Stories gives Facebook a ‘storybook’ quarter

Despite spats with the government and controversies about data mishandling, Facebook Inc. is doing what it does best. Read More...

Despite spats with the government and controversies about data mishandling, Facebook Inc. had a “storybook” quarter, analysts said on Thursday.

Facebook continues to thrive, with the stock FB, +6.08%   jumping after the company posted strong first-quarter results. The company announced on Wednesday that it took a $3 billion charge in anticipation of a Federal Trade Commission violation — but the social-media giant remains a money machine. It’s making progress on its efforts to turn Instagram into a larger revenue engine, and momentum here is helping to drive shares higher on Thursday.

The controversy around Instagram from a business perspective is that its users increasingly prefer viewing ephemeral Stories content on the platform, rather than traditional posts in a news feed. Chief Financial Dave Wehner admitted that Stories will remain a revenue “headwind” in the near term, as the format currently commands lower ad prices than the traditional feed does, but analysts seemed satisfied with where things stand.

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“While 2019 remains a year of transition, Facebook’s management has now produced multiple quarters with ahead-of-consensus revenue/EPS performance (we believe driven by user/ engagement/revenue growth on Instagram),” wrote UBS analyst Eric Sheridan, who upgraded the stock to buy from neutral and raised his target price to $240 from $170. “Instagram is now one of the internet’s large scaled digital ad platforms that can sustain growth & operating leverage (even as the platform transitions to Stories/shopping) for years to come.”

Facebook said that it has more than 500 million daily active users engaging in Stories content across its various platforms, as well as 3 million advertisers marketing through the format. Such figures suggest that Stories represent “more than green shoots” to Facebook nowadays, according to Morgan Stanley’s Brian Nowak, who has an overweight rating on the stock and a new price target of $210, up from $195 before the report.

Nowak titled his note to clients, “Another Storybook Quarter.” Baird’s Colin Sebastian praised Facebook’s “‘story-book’ start to 2019.”

RBC Capital Markets analyst Mark Mahaney pointed to relatively stable performance in North America ad revenue. “In North America — its largest, most mature, and plausibly most Insta Stories-impacted market — its growth rate has barely changed over the last three quarters (33%, 31%, 30%),” he wrote. “We believe that’s really sticky!”

Mahaney has an outperform rating and increased his target price to $250 from $200 after earnings.

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Guggenheim’s Michael Morris highlighted the breadth of Facebook’s efforts to monetize its various services beyond the core Facebook news feed. “In terms of incremental monetization channels, Facebook has shifted its efforts toward stories over feed formats while secondarily building infrastructure for marketers (>7mm across all properties) to capitalize on messaging and commerce,” he wrote.

Opportunities in video and payments are still in the “early stages,” in Morris’ view, but the company has proved dominant in its ability to squeeze out more revenue per user. He expects that the company will bring in $3.54 per daily active user this year and $6.07 per daily active user in 2023. Morris rates the stock a buy and upped his target price to $220 from $200.

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Analysts also weighed in on the $3 billion charge related to the FTC consent decree and other regulatory issues.

“While this is a significant sum, we believe that the potential for a fine has long been priced into Facebook shares, and we think the company prudently took the step of recognizing the potential fine and putting any prospective financial risk behind it,” wrote Wedbush analyst Michael Pachter, who rates shares at outperform and also increased his price target to $220 from $200.

Needham’s Laura Martin, however, wonders if regulators “are destroying Facebook’s business model.” She cites the company’s plans to spend a year consulting global regulators before building a new private communications tool.

“This represents an extra cost in time and money tied to heightened regulatory scrutiny of Facebook,” wrote Martin, who has a neutral rating on the stock.

Facebook shares have gained 47% so far this year, as the S&P 500 SPX, +0.10%  has added 17%.

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