Facebook (FB), the social media giant, reports after the closing bell on Wednesday, January 29th, 2014. Analyst consensus per ThomsonReuters is currently expecting $0.27 in earnings per share (EPS) on $2.32 billion in revenues, for expected year-over-year growth of 59% and 92% respectively.
Exiting the October '13 quarter's report, the consensus EPS and revenue estimates were for $0.22 and $2.2 billion respectively, thus the last three months have seen a steady upward revision in analyst consensus. It is pretty clear that FB is experiencing some very good growth.
The sentiment around the stock seems horrid as just last week, I believe it was a Princeton study that noted or expected that 80% of FB's users would disappear from the site, with the study being debunked by both Facebook and Wall Street CheatSheet as this article details.
With a stock sporting the valuation of FB's, we simply look to estimate revisions to get a feel for earnings and revenue momentum:
First column is quarter-ended that date;
The EPS data is courtesy of ThomsonReuters which is the current consensus EPS estimate for each calendar year for that date. The "y/y gro" is the year-over-year growth rate, which means the 2014 estimate divided by the 2013 estimate and the 2015 estimate divided by the 2014 estimate. In terms of the color or perspective on the numbers, it was the July '13 quarter where FB put up a huge mobile ad revenue print, and it turned the tide on the stock.
FB rose almost 100% alone in q3 '13, and has since consolidated that gain. In Q3 '13, revenue rose 60%, operating income rose 95% and EPS rose 108%, all year-over-year.
While we continue to track daily average users (DAUs), and monthly average users (MAUs), going forward it is the "monetization' of the user base, and ad revenue that will drive the stock price. Obviously growing users will help, but my own opinion is that one Mom who spends, is better than 10 teens who don't, and a fading younger demographic amongst teens and such, while it might be grist for the bears, won't matter if ad revenue and online spend grows.
Y/Y growth rates for FB's P/L
Source: internal spreadsheet, using FB's Income Statement data
The "12/13" data is estimated per current consensus, while the growth rates are actual for 9/13 and prior.
Finally, the valuation around FB is its most unattractive feature. Even though consensus revenue and EPS estimate continue to look for very strong growth, FB is trading at roughly 45(x) 2014 consensus EPS for expected growth next year of roughly 35%. Some might say that - given that growth rate - FB deserved a 70(x) multiple that the technology stocks garnered during the late 1990's, but the point is that there is little room for error with such a valuation.
45(x) cash-flow and 80(x) free-cash-flow as of 9/30/13 doesn't give investors much comfort either.
What does give me comfort and why we continue to hold the stock is the plethora of negative articles and commentary about FB's user base, which in my opinion displays a sentiment perspective, that is the complete opposite of the mo-mo tech stocks of the late 1990s and thus makes me think that analysts and investors have underappreciated FB's upside in what is really a fairly-valued market.
Morningstar puts an intrinsic value on FB near $35 - $36 per share, which is consistent with their conservative discounted cash-flow model. Our internal earnings-based model, which I think captures more of early-stage growth prospects for younger companies, puts an intrinsic value on FB as of 10/31 of $111 per share.
Sum the two intrinsic value estimates, and cut in half (to incorporate both kinds of models) and we think FB is fairly valued near $73, and thus is trading at a 29% discount to what we believe is intrinsic value.
The one element to FB that scares me greatly is the market cap of $130 bl versus Twitter's (TWTR) $30 bl. For all the grief that Morgan Stanley took for that IPO, they did their job in realizing a lot value at the initial price for FB and Mark Zuckerberg. (I'm sure a reader will give me another perspective on that.)
FB doesn't start lapping truly tougher revenue and EPS compares until the July '14 quarterly earnings release.
I still think there is some growth left in this stock, but the fact is that with the kind of market we've started 2014 with in terms of the SP 500 action, it might be far tougher to generate p.e expansion and expand the multiple in a tough tape.
We don't plan on changing our FB position prior to Wednesday's earnings release.