Facebook Inc (NASDAQ:FB) will report second-quarter earnings after the market closes on Wednesday. The consensus is for FB stock revenue to grow nearly 50% year-over-year to $6 billion. Analysts polled by Reuters expect per-share earnings of 82 cents a share, an increase of 64%, and reflecting an increase in margins.
Given this outlook, you might think that if Facebook earnings are strong that FB stock will soar. However, when a social media company supports a market capitalization of $350 billion, moving the needle becomes much harder to do.
Facebook Earnings Preview
When Facebook reports earnings, it will be all the little things that matter most to investors. For example, investors will pay close attention to user metrics on all of Facebook’s top web and mobile properties.
Facebook already announced that Messenger has surpassed a billion active users and has over 11,000 “bots” on the platform. Therefore, any monetization plans could end up being the catalyst Facebook stock needs; the same applies to WhatsApp, Facebook’s other billion-user mobile messaging application. Both Messenger and WhatsApp are key to future earnings growth as FB monetizes the platforms.
Furthermore, we know that Instagram surpassed 500 million monthly active users in June, but after getting off to a hot start, are advertisers still rushing to the service? Or, are other up-and-coming services like Snapchat stealing some of Facebook’s thunder?
Then, there is Facebook core, and the North American operations that create most of the revenue for Facebook CEO Mark Zuckerberg. Investors will pay close attention to Facebook’s daily active users, which grew 5% sequentially to 1.09 billion during Q1; and to whether the daily active users and monthly active users of 1.65 billion can maintain that mid-single digit sequential growth rate.
Lastly, user engagement is always an important metric. User engagement is essentially DAUs as a percent of MAUs. In the first quarter user engagement hit an all-time high of 66%, which played a pivotal role in the accelerated DAU growth.
Can FB stock Go Higher?
FB stock is not priced for the present, but rather, what it could become down the road. If Facebook stock were to trade at the same price-earnings multiple as Apple Inc. (NASDAQ:AAPL), it would have to earn $11/share to support $120.
Most analysts don’t see earnings of $11/share as a possibility until 2020 at the earliest. Notably, that’s only if Facebook can meet high expectations this year, grow earnings 30% next year, and then sees accelerated earnings growth of 35% in each of the three years that follow.
Clearly, that would be a tall task for Facebook to complete, a very unlikely one. It would assume that FB will perform even better in the future than its current trajectory suggests, and assumes that no headwinds delay growth. In my opinion, this is very unlikely, as there are many things that could create problems for Facebook that aren’t reflected in the valuation. Personally, I think Facebook’s issue with the IRS could pose a problem, one that has been overlooked by shareholders.
The bottom line is that it is very hard to see how FB adds more value from here. But investors will certainly run fine-tooth combs through every detail in the Facebook earnings report for indicators.
What Facebook’s earnings growth outlook illustrates, however, is that no matter how many users it has on Instagram, or how much user engagement improves, FB stock at $120 is in fact priced at a hefty premium to future earnings.
Therefore, I’m not sure how much upside exists with Facebook hitting on all metrics. After all, if FB stock looks expensive compared to FY2020 earnings right now, just think of what it would look like with another 20% upside in Facebook stock.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.