Facebook's Wild Ride Continues

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Investors in Facebook, Inc. (NASDAQ: FB) have learned to face two separate and distinct realities. First, the company has made a habit of blowing past analysts' financial expectations seemingly quarter after quarter -- and investors don't seem to mind. Second, and of greater concern to investors, is that the company has become a lightning rod for any number of public missteps and societal trends.

Issues such as fake news, terrorist communication on its site, political ads bought by foreign operatives, and video of crimes posted on the platform have all cast the company in a negative light.

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Those two realities were in full view again when Facebook released its fourth-quarter 2017 financial report.

Massive growth

For the just-completed quarter, Facebook generated revenue of $12.972 billion, up 47% year over year, and soaring past analysts' consensus estimates of $12.55 billion. The company's operating profit spiked 61% and operating margin grew to 57% compared with 52% in the prior-year quarter. Net income grew an impressive 20% year over year to $4.268 billion, producing diluted earnings per share of $1.44.

Facebook took a one-time charge to increase its provision for income taxes of $2.27 billion as the result of recently enacted tax legislation. Adjusting for the impact of this move produced earnings of $2.21 per share, eclipsing the $1.94 per share analysts expected.

Mobile advertising revenue grew to a monstrous $11.37 billion, up 57% year over year, and now accounts for 89% of the total, up from 84% in the prior-year quarter. The average price per ad was up 43%, while ad impressions grew 4% year over year. Average revenue per user worldwide grew to $6.18, up 28% over the same quarter last year.

Focusing on the user experience

The social-media platform saw monthly active users grow to all-time highs of 2.13 billion, up 14% over the prior-year quarter, while daily visitors to the site grew to 1.4 billion, also up 14% year over year. WhatsApp crossed a milestone, as users exceeded 1.5 billion each month, while Instagram exceeded 25 million business profiles, up from 15 million in July. Stories on Instagram has daily users exceeding 300 million.

CEO Mark Zuckerberg revealed that the company had made changes to the platform's news feed, showing fewer viral videos, and "prioritizing meaningful social interactions over passive consumption of content." These changes had users spending less time on the platform every day. In a prepared statement, Zuckerberg said: "In total, we made changes that reduced time spent on Facebook by roughly 50 million hours every day. By focusing on meaningful connections, our community and business will be stronger over the long term."

Zuckerberg also said he believes that some measures of engagement would decline over the short term, estimating that time spent on Facebook declined 5% during the fourth quarter. He said the company was working toward "preventing false news, hate speech, and other abuse" and would be making greater investments in "both people and technology."

As the result of these investments, total expenses will grow 45% to 60% in 2018 compared with last year. Zuckerberg also said spending would "significantly impact our profitability" but over the longer term would "build a stronger community." The company expects capital spending between $14 billion and $15 billion in 2018.

Looking ahead

Facebook believes that creating a more positive experience for users will result in "more monetization opportunities." While investors were initially concerned about the decrease in time spent, Zuckerberg said: "The most important driver of our business has never been time spent by itself. It's the quality of the conversations and connections."

Facebook has a lot of work ahead to repair the damage done to its image in recent months. The company appears to be taking steps to do just that, and while it may affect Facebook's profitability in the short term, it will benefit the business in the long term.

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Danny Vena owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool has a disclosure policy.

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