Facebook's financial results were better than expected, although the pace of expansion of the active user base failed to surprise investors.
Facebook's revenue for the second quarter increased by 56% y/y, reaching a record $29.08 billion. This exceeded not only the consensus expectations, which laid the indicator at the level of $27.85 billion, but also the most optimistic forecast of analysts surveyed by FactSet, which assumed a value of $28.76 billion. As expected, the main driver of growth was an increase in the average cost of advertising impressions by 47% y/y, and a secondary one was an increase in the number of advertising impressions by 6% y/y. Facebook's revenue in 2021 is increasing due to higher advertising prices due to high demand from advertisers. EPS, which was predicted at $3.04, in fact reached $3.61. This result was positively influenced by the operating margin, which increased from 32% to 43%, with a consensus of 38%.
The average daily Facebook audience (DAU) increased to 1.908 billion (+6.9% y/y), the monthly audience (MAU) reached 2.895 billion (+7.2% y/y). These indicators fall short of market forecasts for the second quarter in a row. Investors expected to see values of 1.911 billion and 2.913 billion, respectively. Instagram Facebook's monthly audience of all its services (including WhatsApp and Instagram) was 3.51 billion, compared to 3.45 billion a quarter earlier. Facebook's global audience is growing exclusively due to emerging markets, with the Asia-Pacific region playing a special role. In the US and Canada, the DAU indicator remained at the level of the previous two quarters of 195 million. Moreover, in the first quarter of 2020, the indicator was the same. The lack of expansion of an active audience in such a mature market is quite understandable. The audience data in Europe is of little concern: the DAU indicator fell from 309 million to 307 million, while investors expected it to increase to 312 million. According to Facebook management, it is very difficult to predict the dynamics of the audience in the post-market time, since last year online activity was increased all over the world, and now we are seeing its normalization. In addition, the company's services face competition with Snapchat, Telegram and other communication applications, including iMessage, which is popular in the United States. In the context of slowing audience growth, the company relies on the introduction of new features and offers that will help keep user engagement at a high level. Earlier, the company announced that it plans to allocate $1 billion to support content creators.
Management again showed caution when commenting on the prospects for business growth in 2021. It was noted that the App Tracking Transparency (ATT) policy in iOS 14.5 limited Facebook's revenue growth in the second quarter, and will create even more difficulties in the next. However, the consensus of expectations for revenue signals the insignificance of this effect. Management has not changed its plans for costs and investments for the current year: total expenses will amount to $70-73 billion, capital investments - $19-21 billion.
During the conference call, Facebook CEO Mark Zuckerberg again focused on the development of VR/AR technologies. He noted that sales of VR devices are growing. Non-advertising revenue in the reporting quarter increased by 36% y/y, to $497 million. The head of the company announced that the next device offered to Facebook users will be smart glasses designed in conjunction with the Ray-Ban brand. However, this gadget will not be a full-fledged AR device, and the set of characteristics and functions is not disclosed.
The target price for Facebook shares is $420. We still consider its shares attractive in the long term. However, in the short term, investors may take a wait-and-see position, since the company's revenue growth will slow down year-on-year, and the insufficient pace of audience expansion in the United States and Europe creates uncertainty.