Facebook Inc – Is FB Stock Just Too Hot to Handle Now?

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After slogging it through the markets this year in an uncharacteristically pessimistic environment, Facebook Inc (FB) finally got its mojo back.

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Just last week, Facebook stock was down 8% for the month as economic and geopolitical concerns weighed heavily on the broad indices. But with the massive outperformance on Facebook earnings, FB jumped 13% on Thursday morning and appears poised to continue its dominance in the markets.

But is the latest reactionary move all we’re going to get … or can FB stock attract even more buyers throughout 2016?

Facebook Earnings

Few analysts will dare take a contrarian view on Facebook’s most recent earnings report — and for good reason. For the fourth quarter of fiscal 2015, FB rang up $5.84 billion in top-line sales, an increase of nearly 52% from the year-ago quarter. To put that into perspective, it’s the second-highest YoY sales increase since Q3 FY2014. More importantly, net income jumped to $1.56 billion, a 126% move from $701 million a year ago.

Wall Street consensus pegged Facebook’s adjusted earnings per share at 67 cents — a target that was easily surpassed when actual results came in 12 cents higher.

Perhaps the most significant piece of non-financial news from the Facebook earnings report is the continued strength in membership trends. FB gained 46 million new users in Q4, bringing its total worldwide tally to 1.59 billion. Mobile user growth was particularly noteworthy as 80% of FB’s advertising revenue now is attributed to e-marketing campaigns specifically targeting smartphones and tablets.

Facebook earnings per share
Source: Source: JYE Financial, unless otherwise indicated

The idea, of course, is that a wider audience greatly increases the potential for ad conversions and other monetization activities. Certainly, a ramp-up in membership rates is an absolute necessity for FB to close the gap with Google, which was recently renamed Alphabet Inc. (GOOGL).

But regardless of the impressive performance of the Facebook earnings report, the company still faces significant challenges ahead.

It’s true that FB owns social media, but Google owns the Internet — and this will not be a crown so easily relinquished. Furthermore, the usage and demographics data isn’t exactly the most favorable for ad-conversion pursuits.

According to FB chief executive officer Mark Zuckerberg, the average American spends about 40 minutes daily on Facebook.com compared to more than five hours watching television. And while the 25- to 34-year-old age group is FB’s most popular demographic, Nielsen data shows that TV viewing increases steadily with age.

Tack on another two or three hours that Americans spend listening to radio — yes, that ancient relic — and the message becomes surprisingly clear: Facebook’s dogged pursuit of Google may cause them to ignore the potential threat posed by traditional media, and that may turn out to be a very big mistake.

What Should You Do With Facebook Stock?

Another oversight would be to acquire FB stock simply on the basis of its strong earnings report. Though the mainstream media is heaping praise on Facebook, the truth is that Q4 wasn’t that remarkable compared to historical results.

During FY2014, the average earnings surprise was nearly 22.5%. In FY2015, inclusive of the most recent Facebook earnings report, the average beat dropped down to 10%.

That’s really good — just not as good as it was.

Perhaps Wall Street has gotten better at forecasting Facebook’s financials. That would also suggest, however, that investors are raising the bar for FB stock and receiving incrementally lesser returns.

While it’s a tough argument to propose selling FB, it’s equally tough to recommend it at the present market value. Traders have recently shown hesitation in buying the news, which should give the rest of us pause. Facebook’s fundamentals are also subject to fierce competition, both from the digital sphere as well as from traditional media outlets.

If you’re in Facebook, enjoy today. But new money … well, given the broad weakness in the markets, you might want to wait out today’s euphoria.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/facebook-q4-earnings-recap-fb-stock/.

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