News that Facebook Inc (NASDAQ:FB) is testing a Snapchat killer is taking attention away from the fact that the stage is set for FB stock to deliver more amazing revenue and earnings growth next week.
To be sure, Facebook’s attack on Snapchat is big news. It’s just a little bit early in the game for it to affect FB stock. It’s no shocker that Faceobok wants to address the threat from Snapchat head-on. Besides, the company’s product is still in the testing phase.
It does sound promising. The social network revamped it its camera app to feature the same filters that Snapchat does. And like, Snapchat, FB snaps disappear after 24 hours.
At this point, however, it’s just a test. Facebook will try it out in Ireland before rolling it out to everyone else. It very much remains to be seen if the Snapchat copy can peel away users from the first-mover app. If it does, it won’t be retail to results for some time.
What is material is that analysts expect big things when Facebook releases quarterly earnings on Nov. 2.
Wall Street expects earnings per share to grow to 97 cents from 57 cents per share of FB stock in the same quarter last year, according to a survey by Thomson Reuters. Revenue is projected to rise by more than half to $6.92 billion.
As strong as those numbers may be, expectations are everything. On that count, Facebook has a great track record of delivering positive surprises. It has topped Wall Street’s revenue estimate for five consecutive quarters. More importantly, FB has beaten on the bottom line for years now.
Facebook’s Biggest Competitor Is Itself
If there’s a worry, it’s that Facebook has set the bar so high for itself. After a blowout second quarter, it’s expected to show sequential deceleration in its revenue growth rate. This should already be baked into the share price but nothing spooks investors in a name like Facebook stock like the words “slowing growth.”
It’s also critical that Facebook keep up its pace of user growth, which rose 15% year-over-year to top 1.7 billion as of Q2. As the user growth base rises, it should, in theory, be more and more difficult to keep up the rate of expansion.
User engagement — or the percentage of people using the service everyday — is also clipping along with eye-popping consistency. As of Q2 it was at 66%, which is an unheard of level of engagement.
In a nutshell, if Facebook’s third quarter is anything like its second quarter, it’s going to crush expectations all over the place — revenue, profits, margins, engagement, you name it.
We don’t know how much of this is already reflected in Facebook’s stock price, but it’s probably not enough.
Bottom Line on Facebook Stock
Sentiment on FB is spectacular. It’s as if everyone wants a piece. There’s no reason to think Facebook stock can’t enjoy multiple expansion. After all, investors have been willing to pay more for this stock in the past. Over the past five years, investors have paid an average of 42 times forward earnings for shares.
Click to Enlarge Today, FB stock trades at 26 times forward earnings. Sounds rich until you consider the expectations. For the next half-decade, Facebook is projected to deliver compound annual growth of 35%. Ordinarily, a stock’s price-to-earnings ratio is higher than its growth rate.
On the technical front, Facebook stock has been in an uptrend since mid-summer, trading comfortably above its 50-day and 200-day moving averages. In other words, FB has plenty of momentum.
With a nearly unblemished track record of Street-beating quarterly reports — and a head of steam coming out of Q2 — this week’s earnings could serve up yet another catalyst for Facebook stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
