Facebook Inc. (NASDAQ:FB) reports earnings on November 1 and investors are expecting big things.
The consensus is it will earn $1.28 per share on revenue of $9.88 billion. That would represent growth of 41% on the top line, and 49% on the bottom line, compared with the same quarter a year ago. But analysts are whispering the earnings could come in at $1.40 per share, so expect the stock to rise into earnings.
Facebook is already one of the hottest stocks on the market, rising 54% so far in 2017, more than doubling the return on the NASDAQ average. It has also kept rising as its price-to-earnings multiple has fallen, meaning it has justified speculators’ confidence.
But investors don’t buy what you did. They buy what you are going to do. Does Facebook look better in the rear-view mirror?
Facebook is Not Just Facebook
It’s important to note that the company isn’t just the Facebook service anymore.
Facebook is Instagram. It’s Messenger. It’s Whatsapp. It’s a cloud network and an ad network. Its stock has lapped that of Alphabet Inc. (NASDAQ:GOOGL), growing 700% in the last five years against the House of Google’s 200%.
FB’s gains have even doubled those of Amazon.com Inc. (NASDAQ:AMZN) over that span, and founder Mark Zuckerberg is the only billionaire on the Forbes 400 list whose fortune has been able to keep up with that of Amazon founder Jeff Bezos, now the world’s richest person, in 2017.
But if I had to own one of those two stocks today, I’d own Amazon because Facebook has such a huge market share within its social niche, while Amazon has room to grow.
The Facebook Problem
The Facebook service, meanwhile, has moved from being the company’s biggest cash cow to its biggest problem. It is still reluctant to acknowledge its political or media power and, while tweaking its News Feed is good, it’s hard to see how that grows the bottom line.
With almost 2 billion monthly users by the second quarter of 2017, even while it’s still being kept out of China, the statistics on Facebook are simply staggering.
The problem is that the 50 minutes per day the average user spends on Facebook and Instagram is already priced into the stock.
The key to growth, then, is for Facebook to get more revenue out of these users. Luke Lango sees it doing this by taking out Grubhub Inc. (NYSE:GRUB) as a food ordering service, taking out services like eBay Inc. (NASDAQ:EBAY) through its Marketplace, and going after Alphabet’s YouTube in video streaming.
Growth Limits for Facebook?
Facebook faces serious competition in all these areas. Even if it bought Netflix Inc. (NASDAQ:NFLX), which it could easily do for stock if Netflix hits a rough patch, it would still face huge competition from Amazon. Grubhub and eBay are not going to go down easily, either.
As with Alphabet, FB has been slow to open its cloud to other companies. It is still trying to fill that capacity with its own brands, moving WhatsApp off International Business Machines Corp. (NYSE:IBM) and its SoftLayer cloud, for instance.
The challenge of generating new traffic, or new cloud usage, doesn’t look like a problem when a company has Facebook’s growth rate and 50% operating margins. With over $35 billion in cash and short-term investments on its books as of June, and zero debt, the company can buy its way out of short term problems.
But any slowdown in growth, any slowdown in monetization, is going to hit this stock hard. I suspect we are approaching peak Facebook. I have been in the stock for about one year, I have a fat gain, but my itch to sell is growing.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in FB and AMZN.
