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Facebook's (FB) Guidance Takes Shine Off Stellar Q3 Margins

Facebook FB reported third-quarter 2017 results wherein both earnings and revenues beat the Zacks Consensus Estimate.

Strong Margins

Facebook’s reported operating income of $5.1 billion, which increased 64% year over year. Operating margin was 50% compared with 44% reported in the year-ago period.

Though cost and expenses increased 34% to $4.92 billion due to a rise in workforce and marketing expenses, robust revenue growth (47%) provided enough cushion to operating margins.

However, management said that, “We're serious about preventing abuse on our platforms. We're investing so much in security that it will impact our profitability. Protecting our community is more important than maximizing our profits”, and slashed expectations for future margin growth in light of the recent events.

This overshadowed its stellar third-quarter earnings report with shares down over 2.5% since earnings announcement. However, year to date, Facebook’s shares have generated a return of 54.5% compared with the industry’s gain of 31.1%.

Russian Ad Fiasco

Facebook has been in the eye of the storm ever since it revealed that Russian actors misused the platform to influence the outcome of the 2016 presidential elections. These ads were mostly targeted at divisions on grounds of politics and social norms and often touched upon sensitive topics like immigration and racial issues, gun rights as well as LGBT matters.

Facebook recently stated that about 126 million users might have watched the Russia-backed ads on its platform and 20 million on Instagram, per media reports. The company’s is now facing a Congressional probe.

Not just Facebook, even Twitter TWTR and Alphabet GOOGL are also facing probe for their alleged role in dissemination of fake news that influenced the elections.

Focus on Security

Facebook will now make sizable investments to strengthen security on its platform. The company will double the number of people working on safety and security to 20K by 2018. Facebook’s workforce is already strong at 23K (as of Sep 30, 2017).

However, Facebook has added that the 10K new employees will include hiring at the company’s partners as well. “So, that’s a fully loaded number. So that's also in the OpEx guidance as well. But yes, you can't compare the 10,000 to the 23,000 directly,” added Facebook at the earnings conference call.

Also, expenses will rise due to investments made in video content to support Watch and development of augmented/virtual reality (AR/VR) and artificial intelligence (AI).

For 2018, the company anticipates total expenses to increase 45% to 60% year over year. Additional spend on infrastructure to support and improve the available products will lead to a 100% increase in capex in 2018. 

At present, Facebook carries a Zacks Rank #2 (Buy).

Stock to Consider

A better-ranked stock in the broader technology sector is Jabil Inc JBL, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Jabil is currently projected to be 12%.

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