By Carla Fried
Facebook (FB) just did what Google (GOOG) and Intel (INTC) couldn't in the second quarter: ride the mobile platform tide to revenue growth. Facebook announced a 53% rise in second-quarter revenue on the back of a 61% gain in its advertising revenue (the bulk of Facebook's revenue stream). Within that advertising segment, mobile ad revenue rose 75% to $656 million. Analysts had been expecting mobile ad revenue to come in around $455 million for the quarter. Surprise -- it's the surprise of this earnings season -- doesn't seem to do that beat justice. In just six months Facebook has seen daily mobile users rise from 293 million to 469 million.
Facebook announced that startling result after the market close on Wednesday July 24. By mid-day Thursday, Facebook trading volume was over 221 million shares. As this stock chart shows, that's more than seven times the normal pace for the month.
FB data by YCharts
Sellers are having a fine time, as the stock price rose 25% on the strong second quarter-earnings. But buying at $33 and change is a bit of a valuation leap of faith.
FB data by YCharts
The index is rebalanced quarterly, to hold the 20 wide-moat stocks that are trading at the steepest price discount to Morningstar's estimate of their fair value. At the time of that late June rebalance, Facebook was trading at a 30% discount to Morningstar's $34 per share fair value estimate. That made Facebook the second-cheapest stock in the 20-stock portfolio. Only Western Union (WU) and its 32% discount was cheaper.
In a note following Facebook's monster 2nd-quarter release, Morningstar (Full Disclosure: Morningstar is an investor in YCharts) analyst Rick Summer reiterated that Morningstar is keeping its $34 fair value estimate. So by Morningstar's own criteria, if the Wide Moat index was rebalanced today, Facebook would be sold at a sweet profit given that the stock now sells at a discount of less than 3% of its fair value. Among Morningstar's universe of wide moat stocks that would be replacement candidates are companies such as Microsoft (MSFT), Coca-Cola (KO), and Baxter International (BAX), which recently traded at discounts of at least 10% to Morningstar's estimate of fair value.
That's not to say Facebook is primed for a fall. In fact, Morningstar puts a price north of $50 a share on when investors should consider selling. What has shifted in less than one trading day is that Facebook has gone from a value stock to a growth stock with a whole lot of continued growth expectations embedded in its current price.
The current expectation is for Facebook's per-share earnings to come in at 39 cents for the year. It earned 9 cents in the first quarter and 13 cents in the second quarter. Even if earnings didn't grow in the final two quarters and held at 13 cents per diluted share, that gets us to 48 cents. But just keep in mind that EPS has been anything but a straight line north:
FB EPS Diluted Quarterly data by YCharts
Convinced the mobile push is a game changer? Okay, let's presume the second quarter EPS growth rate of 44% over the first quarter can be replicated in the next two quarters. That gets us to about 68 cents a share. That works out to a 49 PE ratio based on Facebook's current price. That's still way short of where the market has sent the forward PE ratio in the last 24 hours:
FB Forward PE Ratio data by YCharts
Sure, Facebook could see accelerated earnings growth above the 2nd-quarter rate, but its own success is going to make that harder. At the beginning of the year, daily mobile users accounted for 56% of total daily users, as of the end of the second quarter that was up to 67%. Still room for growth, but closing fast. All eyes -- and expectations -- are on Facebook's expected launch of video advertising to provide another revenue jolt. And maybe someday it will get around to monetizing the $1 billion Instagram investment. Plenty of opportunity. But after a 25% price gain, a dicier value proposition going forward.