3 Reasons to Love Facebook Inc Ahead of Earnings (FB)

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FB - 3 Reasons to Love Facebook Inc Ahead of Earnings (FB)

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Superficially speaking, the fact that Facebook Inc (FB) is expected to report slower sales and earnings growth last quarter is a cause for concern.

3 Reasons to Love Facebook Inc Ahead of Earnings (FB)Under the hood, though, most investors understand that even a modest amount of growth for a giant doesn’t make that giant any smaller. Translation: Facebook on its worst day is still better than most other companies on their best days.

It’s a philosophical debate that’s sure to be put to the test after the market closes on Wednesday, when the social networking website operator is slated to post its fourth-quarter numbers.

So far, though, the market is pricing in another quarter of good news.

Facebook Earnings Outlook

As of the latest tally, analysts are looking for earnings of 68 cents per share on revenue of $5.36 billion. Those numbers would be up 26% and 39%, respectively, from the year-ago figures of a profit of 54 cents per share and sales of $3.85 billion.

Impressed? Not everyone is. There are some concerns that both figures trail the earnings growth rate of 33% and top-line growth rate of 41% seen just a quarter earlier.

The slowdown is merely a matter of perception, mind you; the bigger a comparison number, the smaller the percentage change becomes. Don’t be fooled by the math, though. This time around, FB’s per-share earnings are projected to grow by 14 cents. In the third quarter they were up 14 cents.

The same goes for revenue. In Q3 of last year, revenue grew $1.3 billion on a year-over-year basis. This time around the top line is expected to grow to the tune of $1.5 billion, year-over-year.

In other words, Facebook will be doing just fine if it merely meets “lackluster” fourth-quarter outlooks. That said, it’s worth noting Facebook has topped income estimates in each of its past ten quarters.

Odds are good an eleventh straight earnings beat is in the cards.

3 Things for Investors to Chew On

Facebook continues to be a compelling anomaly, as RBC Capital Markets analyst Mark Mahaney opined by recently saying “Facebook continues to generate very high and very profitable growth, an extremely rare combination, and we see in Facebook plenty of strong, secular platform growth ahead.”

All the same, there are three particular items that will ultimately drive (or fail to drive) the results that are presently driving the stock higher. In no certain order:

  • Instagram: Though it’s been under the Facebook umbrella since the middle of 2012, Facebook never seemed all that interested in monetizing the photo-sharing app. That’s changed, though. While the number of ads injected into the Instagram feed technically started to rise in August of last year, it’s only become undeniable within the past couple of weeks. Facebook doesn’t break out its Instagram revenue (at least not yet), but now that it’s turned up the heat investors should start hearing some more details about its impact. That said, some analysts believe Instagram could drive $3 billion in sales this year.
  • User Growth: While sales and profits continue to grow, at the heart of that growth is an increasing number of new users in addition to greater engagement (time spent on Facebook) for existing users. With 1.5 billion users already on board, though, the point of saturation of the plausible market — yes, there are people who have no interest in Facebook and/or no ability to join — may be nearer than most investors appreciate. At some point, Facebook will have to rely on growth by extracting more revenue per existing users. It’s good at it already, but it’s not clear how much better it can get. That said, last quarter’s 4% sequential growth in its user base was actually an improvement on its recent norm.
  • WhatsApp: While the Facebook-owned messaging service is popular, it only drove revenue from its purchase price of 99 cents. Facebook dropped the front-door charge recently, however, making it available for free to anybody who wanted it. So why bother with it now? Because Facebook is testing out a business-to-consumer chat platform to leverage WhatsApp, and it may bear more fruit than WhatsApp does as a paid tool. It remains to be seen how it will perform, as this is new territory for Facebook in a field with a lot of competition.

While those three fronts will be the centerpiece of most of the rhetoric surrounding FB in the foreseeable future, bear in mind they’re just short-term factors.

In the long run, the fact that Facebook is a great product consumers love and advertisers understand makes the stock easy to own, particularly if the frothy price-earnings values are reeled in.

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


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

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