Facebook Inc: FB Stock Is Worth Every Last Penny

Facebook earnings prove that FB stock can go even higher as growth accelerates, margins improve and analysts fail to keep up

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Just when you think that Facebook Inc (NASDAQ:FB) has reached its peak, and that FB stock can’t possibly go any higher, the company blows the doors off analyst expectations yet again, and shares reach new peaks yet again.

What’s important to remember is that analyst expectations were already sky-high. Facebook earnings have topped analyst expectations in each quarter since Q1 last year. Therefore, FB stock holders have grown accustomed to big beats and lofty year-over-year growth figures.

However, even for Facebook, the second quarter was something quite special.

What’s So Special?

For Q2, Facebook reported revenue of $6.44 billion and earnings of 97 cents per share of FB stock. That’s $420 million more revenue than analysts expected, making this Facebook’s second-largest beat since becoming a public company. Furthermore, the 15-cent beat was also Facebook’s second biggest ever. And 59.4% revenue growth? Facebook hasn’t grown that fast since back in 2014.

That’s what makes Facebook’s second quarter so darn special. And there’s even a cherry on top — those “second-best ever” performance metrics followed an EPS beat in Q1 and revenue beat in Q4 2015.

Thus, Facebook is performing at a level that analysts clearly can’t keep up with, and neither can the market. FB is beating expectations by such an obscene margin that clearly something big has changed.

What’s Different?

Here’s the thing: Facebook is doing things the market did not think was possible.

After producing already high income margins over 20% last year, net profit grew a whopping 186%. After surpassing 1 billion daily active users (DAUs) last quarter, many thought Facebook had minimal upside room for DAU growth. And then Facebook grew DAUs to 1.13 billion.

Moreover, FB is simply crushing mobile like no one else. It now has 1 billion mobile DAUs and saw revenue growth of 76% during the last quarter in mobile. Currently, mobile advertising revenue amounts to 84% of total revenue.

Collectively, this — along with strong user adoption on Messenger, WhatsApp and Instagram — explains why Facebook is making Wall Street look silly, and why FB stock likely has much further to go.

Isn’t FB Stock Expensive?

The bottom line is that yes, Facebook stock is expensive, and very much so. If you consider its 6% after-hours gains, FB shares are now supporting a market capitalization over $370 billion!

While this may look ridiculous when you consider stock multiples and analyst expectations, it is important to realize just how wrong analysts have been. Prior to Q2 earnings, analysts were expecting Facebook to earn $3.57 per share this year and $4.62 per share in 2017. That would put FB stock at 36x FY2016 EPS and 28x FY2017 EPS.

However, with Facebook beating EPS expectations by an average of 13 cents in each of the last three quarters, investors must realize that valuation metrics are simply wrong. Facebook might very well earn $4 per share this year and $5 per share next year. Then, for a company that’s growing nearly 60% year-over-year, 26x FY2017 EPS doesn’t look that bad.

In fact, it looks borderline cheap.

So while $370 billion for FB stock is a big number to absorb, just keep in mind how fast it’s growing, how fast it will continue to grow and the overall earnings power of this advertising juggernaut.

The fact is, Facebook stock could still have much higher to go.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/07/fb-stock-facebook-q2-earnings/.

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