The Facebook Inc (NASDAQ:FB) growth story apparently has no end. Facebook reported second-quarter earnings after Wednesday’s bell, and the company reported a top- and bottom-line beat that has FB stock pushing higher to new all-time highs.
The immediate reaction was tepid, and it looked like Wall Street had already discounted much of the good news. But the after-hours push now has Facebook scrawling out more gains that, if they stand Thursday, would be yet another reset of all-time highs in a year that has seen plenty.
For its second quarter, revenues spiked by 45% year-over-year to $9.32 billion, and earnings per share came to $1.32, up 69%. Wall Street’s pros were looking for less on both ends — $9.32 billion in sales and $1.13 per share in profits.
FB stock is up 2% in response, on top of a 44% year-to-date gain.
A few other highlights from the report:
- Daily active users (DAUs) reached 1.32 billion, while monthly active users (MAUs) hit 2.01 billion. Both were up a nice 17%.
- Mobile advertising revenues represented 87% of the total, compared to 84% in the same period a year ago.
- During the past year, Facebook increased the global headcount by 43% to 20,658.
- Facebook has $35.45 billion in the bank.
Technically speaking, the sky’s the limit. FB stock is trading a bit higher than its trendline over the past six months, and it’s leaps above its major moving averages.
The only concern is a slightly overbought Relative Strength Index (RSI), but the steady move higher in shares has kept the indicator from reaching the same overextended readings it pushed out in April and May.
A Few Woes
UPDATES: But not everything is perfect, fundamentally speaking.
Revenue growth is decelerating; Q1 sales growth was 49%, and in Q2 2016, Facebook was able to muster an impressive jump of 59%. Facebook has warned about maximum loads on the News Feed, and slowing seemed inevitable anyway as the revenue base has reached such as massive scale.
Escalating costs are another consideration. In the second quarter, capital expenditures hit $1.44 billion, up from $995 million during the same period a year ago. Facebook must invest in datacenters and other core infrastructure assets to feed the growth in video streaming, which is data-intensive.
Another drag: the payments business, where Q2 revenues fell 20% to $157 million.
FB Stock Is Still a Top Play
These factors are worrisome, but they’re not enough to derail Facebook’s bull case.
Wall Street wants to see sustainable, profitable growth in tech investments. And while Facebook does have a large scale, many of its opportunities are in the early stages, such as monetizing large platforms such as Messenger, Instagram and the Craigslist-style listing service Marketplace. There’s also Workplace, a collaboration tool for companies that may ultimately lead to a recurring cloud-based revenue stream.
Facebook also has demonstrated not just an ability to fight fire with fire, but to fight fire with its opponents’ torches. Facebook’s efforts to use various features from rival Snap Inc (NYSE:SNAP) to transform Instagram and augment Messenger and even the original Facebook app have blunted Snapchat’s growth.
Interestingly enough, mimicry might not be enough for Facebook; FBN Securities analyst Shebly Seyrafi believes that FB would be willing to buy SNAP if the shares fell to $14.
Facebook shares are up more than 40% year-to-date and still trade at a fairly reasonable valuation of 27 times forward earnings estimates, which is a steep discount to the top-line growth rate.
To me, FB stock remains a reliable way to play major trends including mobile, social networking and online video.
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.