On the detractor front, Facebook (NASDAQ:FB) shares fell during the quarter after management warned about a deceleration in the rate of revenue growth and guided for margins to fall over the next several years. The Company posted 42% revenue growth for the fiscal second quarter but guided to a growth rate that seemed to be in the mid-20% for upcoming periods, with margins trending almost 10% lower over a longer-term period. We continue to overweight Facebook and maintain the position as a top holding for several reasons.
First, management has guided to decelerating revenue growth at core Facebook in nearly every quarter for the past few years, so we think there is a good amount of conservatism baked into their implicitly guided growth rates. Second, we think the revenue deceleration can be attributed to management’s proactive strategy of shifting advertisers toward under-monetized properties such as Instagram, Facebook Messenger and WhatsApp, which have less developed advertising ecosystems.
In our view, the aforementioned properties have the potential to not only stabilize growth rates but to reaccelerate as they mature with core Facebook providing a stable, high-margin cash flow stream for reinvestment. Third, management’s lower margin guide implies an incremental $6 billion or more in overhead, which we believe is more than enough capital to ensure the long-term safety and security of the platform. Last, we think the consensus embedded estimates are quite conservative, and Facebook’s fiscal 2020 price-to-earnings multiple of about 19X is very attractive, relative to our investment opportunity set, given the Company’s high absolute growth rate and excellent profitability profile.
From David Rolfe (Trades, Portfolio)'s Wedgewood Partners 3rd quarter 2018 shareholder commentary.
