After the market closes on Tuesday, we’ll get one of the week’s highest-profile reports as social networking company Facebook (FB) earnings for Q3 hit the spotlight.
If analysts are collectively on target regarding the Facebook earnings reports, the organization should post a profit of 40 cents per share of FB stock, on revenue of $3.12 billion. That’s a solid improvement on the bottom line of 25 cents for share from the same quarter a year earlier, and the top line of $3.12 billion would be a 54% increase in the sales figure from the same quarter a year earlier.
As is always the case, though, there’s going to be more to the Facebook earnings report than just the raw numbers.
What Owners of FB Stock Need to Know
To say Facebook has been on a growth tear of late would be an understatement. Over the past four quarters, earnings per share grew 120% compared to the same 12-month stretch a year earlier. Sales have grown 221% year-over-year.
The bulk of that growth has been driven by the company’s successful foray into mobile. In the second quarter of 2013, mobile advertising revenue made up just a tad less than half of the company’s total revenue. In the second quarter of this year, it accounted for 62% of Facebook’s total sales after growing 151% on a year-over-year basis in the second quarter.
That being said …
While expectations remain high, don’t forget that Facebook made a point of warning investors in its Q2 conference call that its revenue growth rate was apt to decline in the second half of 2014 as saturation became more and more of a challenge.
Simultaneously, owners of FB stock also might want to be aware that in the second quarter, total ad impressions actually fell 25% compared to the same quarter a year earlier, mostly thanks to falling impressions on mobile devices. The strong increase in revenue stemmed from a much higher per-view price for those ads. The cost of an ad impression, in fact, rolled in 123% higher in the second quarter of 2014 than it did in the second quarter of 2013.
But while the increase in ad prices is compelling, it’s not likely to be sustainable.
It’s uncertain whether the Facebook earnings update will offer specific revenue figures attributable to the newly launched Slingshot, which takes aim at competing mobile chat platform Snapchat. Slingshot went live in June. The company should also offer more detailed plans and expectations for recent acquisitions LiveRail and Oculus VR. Oculus, LiveRail and Slingshot may be the best ways Facebook can maintain its recent revenue and earnings growth rates, although it still seems unlikely the organization will start ti bear a great deal of fruit from these efforts now or in the immediate future.
Clearly current or prospective shareholders should pay close attention to any verbiage about (or changes to) these dynamics, initiatives, or the outlook for advertising revenue on Tuesday.
Just for the record, Facebook has topped earnings estimates in each of its past five quarters, and has beaten estimates in seven of its nine quarters as a publicly-traded corporation. The odds of another beat are in its favor even if the relative pace of growth is slowing.
After Facebook Earnings …
For those who plan on owning FB stock for the long haul and aren’t particularly worried about the Facebook earnings news Tuesday, know that shares actually could become more volatile later this week than they may be on Wednesday, after the earnings news is posted.
Why? The 178 million currently locked-up FB shares used to make the WhatsApp acquisition will become free-trading shares a couple of days following the Q3 news, which could put downward pressure on the stock as those shares are converted to cash.
The profit-taking pressure could be heightened by the fact FB stock is up 45% year-to-date and is now valued at a fairly frothy trailing P/E of 85.7. Even the forward-looking P/E (fiscal 2015) of 39.5 is tough to justify, despite the current growth rate.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
