In a week that had its share of high-profile disappointments, social media giant Facebook Inc (NASDAQ:FB) topped analyst expectations. Again. and FB stock rallied on the back of those better-than-expected quarterly numbers. Again.
Being best-in-class is nothing new for the digital advertising behemoth. Another quarter, another rally has been a theme for many quarters over the past few years. In fact, Facebook has beaten estimates on the top and bottom lines for nine straight quarters.
And since this string of blowout earnings started in July 2015, FB stock is up about 75%. (The S&P 500 is up 17% in that time.)
One of the underappreciated aspects of Facebook’s quarterly consistency is just how badly the company blows estimates out of the water. The top line typically comes in $100 million to $500 million higher than estimates. EPS have consistently come in about 10 to 20 cents better than Wall Street expects.
Every three months, just before earnings, we hear pundits discuss how Facebook is too big, its sales are too high already, its users are too numerous, for growth to continue at such a rapid clip. While technically true, FB still continues to outdo Wall Street’s constant underestimation.
As long as pundits are willing to doubt, there’s no reason Facebook stock can’t put up another 75% run over the next two years.
Facebook’s Growth
More than one out of every four people in the world use Facebook’s platform, yet it’s still adding users at a far faster rate than most of its competitors. Thus, not only is Facebook dominating, but it’s putting any real concerns about competitive threat to bed.
Last quarter, Snap Inc (NYSE:SNAP), which does not disclose monthly active users (MAUs), added 8 million active users to its platform over the quarter to grow to 166 million daily active users. Twitter Inc (NYSE:TWTR) didn’t add any monthly active users to its 328 million-MAU base, though Recode believes DAUs (Twitter doesn’t disclose hard numbers) are up to 157 million, so 12% year-over-year growth on that front, but based on its own calculations, that number was likely flat quarter-over-quarter.
Over at Facebook, though, the company added 70 million MAUs (to just more than 2 billion) and 41 million DAUs (to 1.33 billion). To get an idea of the percentage growth rates here …
- Snapchat MAU QOQ growth: N/A (to N/A)
- Snapchat DAU QOQ growth: 5.1% (to 166 million)
- Twitter MAU QOQ growth: 0% (to 328 million)
- Twitter DAU QOQ growth: 0% (to 157 million, est.)
- Facebook MAU QOQ growth: 3.6% (to 2 billion)
- Facebook DAU QOQ growth: 3.2% (to 1.33 billion)
To reiterate, Facebook’s user counts are six-eight times the size of Snapchat’s and Twitter’s, yet still growing more than half as quickly as Snapchat’s while Twitter is standing still. And this isn’t a flash in the pan — over the three prior quarters, Facebook added 76 million, 72 million and 76 million MAUs.
The domestic market is adding about 2 million to 3 million users per quarter. Europe is adding between 4 million 9 million users per quarter. Asia-Pacific is adding about 40 million users per quarter. “Rest of World” is adding about 20 million users per quarter.
Not to mention, these figures are only for Facebook itself, and don’t include other massive-growth apps Instagram or WhatsApp.
And there’s more to this growth story than users.
Ads Are Just Fine, Too
Last year, investors were concerned when Facebook management said that ad growth would slow down meaningfully this year. The rationale behind management’s pessimistic outlook was that Facebook’s ad load (the amount of ads Facebook can show on its platform without becoming too much) was maxing out.
Simply put, Facebook couldn’t squeeze many more ads onto the platform without corrupting the user experience.
But those concerns have faded into the background. Yes, advertising revenue growth has come down this year, but not by any alarming amount. Ad revenues grew 63% YOY this time last year, but still grew 47% this past quarter. It’s a slowdown, but nothing to write home about.
Facebook continues to monetize its users better through its legacy platform, but the Instagram ad ramp has been impressive and helped offset a maxed ad load on the mainstay app. That ramp is just starting as underlying trends in social commerce are very strong.
Meanwhile, Messenger is just beginning its path towards monetization, and that will provide an additional leg for revenue growth. WhatsApp is a question mark, but the kind of question mark you want to have — namely, one with an enormous user base.
In other words, Facebook still has several levers to pull to keep ad revenue high.
Bottom Line on FB Stock
Facebook is slowing and will continue slowing. But Wall Street is content to lean pessimistically when it comes to its estimates for just how much Facebook’s ramp will flatten, and reality keeps getting in the way.
This will always go FB’s way if it never changes.
Facebook is a secular growth story that, even if it slows every quarter, it becomes seemingly more impressive every quarter — that it can keep building in spite of its size. The fact that FB has additional apps it can still grow and juice for revenues will only help to keep up the string of positive surprises.
As of this writing, Luke Lango was long FB.
