Can Facebook Inc (FB) Stock Jump Over These Hurdles?

Ahead of earnings for Facebook Inc (NASDAQ:FB), which will come out at the end of trading on Wednesday, investors are certainly upbeat. And why not? FB stock has been a pretty good bet.

Can Facebook Inc (FB) Stock Jump Over These Hurdles?

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But could things be different this time around? Maybe the enthusiasm for Facebook stock is too carried away?

Well, it is important to note that the valuation is still reasonable. The forward price-to-earnings ratio on FB stock is at about 25X. This compares to roughly 20X for both Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft Corporation (NASDAQ:MSFT). And these companies are not growing at anywhere near the pace of Facebook.

What’s more, it seems like Facebook earnings should do fine in Q4. Revenues are expected to jump by 46% to $8.5 billion and adjusted EPS are forecasted to come to $1.31, up from 79 cents during the same period a year ago. Keep in mind that – for the past five quarters – the company has beat the Street on both the top and bottom lines.

FB Stock Still Faces Several Risks

But the real potential issue for Facebook stock is any disappointing commentary on the future growth trends. Interestingly enough, on the Q3 earnings call, the company’s CFO had this ominous thing to say: “We continue to expect that revenue growth rates will decline in Q4 as we lap a strong fourth quarter in 2015. We also continue to expect that our total payments and other fees revenue in Q4 will be lower than it was in the fourth quarter of last year.”

No doubt, this should not be a surprise. As FB gets much larger, it will increasingly get more difficult to churn out strong revenue numbers. It’s the curse of the so-called “law of large numbers.”

Let’s face it, Facebook already has a massive user base. In the most recent quarter, the number of monthly active users hit 1.79 billion, up 16% on a year-over-year basis. There were also a stunning 1.2 billion daily users.

But going forward, what will the sources of new users be? It’s hard to tell. But initiatives from FB show concerns. After all, the company has been working hard to provide internet access to developing nations.

And don’t forget about China. According to a report from the Wall Street Journal, it appears that Facebook has made little progress. Instead, rivals like Weibo Corp (ADR) (NASDAQ:WB) and Tencent (OTCMKTS:TCEHY) have been capitalizing on the opportunity.

At the same time, other problems could affect FB stock. For example, during the last few months, there have been various embarrassing stories about how the company has inflated certain metrics. Might this cause some pushback from advertisers?

Then there is the “fake news” controversy. Granted, the company has taken actions to improve the publishing of news, such as with a focus on credible sources. But this could result in lower clicks and views, which would slow down the revenue momentum for Facebook stock.

Something else that could dampen some of the enthusiasm for FB stock: the upcoming Snapchat IPO, which should hit the markets within the next couple of months. Of course, there will be tremendous buzz and excitement. There will also be the inevitable comparisons to FB. In other words, investors may look at Snapchat as an alternative to Facebook stock when seeking the next growth play.

Overall, Wednesday’s earnings announcement will definitely be important. And if there are signs of deceleration on the top-line, FB stock could be vulnerable, especially since it has already pulled off a nice run for the year.

Tom Taulli runs the InvestorPlace blog IPO Playbook and is a registered investment adviser representative (you can visit his site to learn more about his financial planning services). He is also the author of various books on investing like All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/02/facebook-inc-fb-stock-jump-over-hurdles/.

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