After announcing its quarterly earnings, Facebook's (FB) share price appreciated by more than 10% during after-hours on Tuesday. This is impressive, given that the market was sharply down on the same day. Now, how should investors view Facebook's earnings? Did Facebook enter the "buy" zone yet?
First, let's take a look at the company's quarterly results. Facebook was able to beat the average earnings estimates, although slightly. The company was expected to generate revenue of $1.23 billion and earn 11 cents per share. Instead, it generated $1.26 billion and earned 12 cents per share. Initially many investors weren't impressed with the results as the company's shares were down by 2% shortly after the announcement. Then the company announced other details, which moved the stock price upwards, partly due to short covering.
The number of the company's monthly active users is up by 26% since the same quarter last year. Currently Facebook enjoys 1.01 billion active users, which means that the company generates about $1.25 of revenue per active user per quarter. This rate might fall some in the future as the company adds new members from countries where advertisement is much cheaper than the first world countries like the US, Germany, England, France where most Facebook users currently come from. The company's advertisement sales growth rate was 36% annually, which is larger than Facebook's monthly active user growth rate.
The greatest encouragement for Facebook investors came from the company's mobile devices segment, which is a relatively new venture for the company. Facebook has been highly criticized for not being able to figure out a way to convert the huge potential in mobile devices into revenues. This criticism might come to an end soon. It turns out that the company's management is strongly focused on mobile devices which already account for nearly 14% of the company's total revenues. Keep in mind that mobile users account for more than half of the company's total users, which means there is much more potential there. During the earnings call, the company's CEO Mark Zuckerberg went on to say that it was only a matter of time before the company's mobile revenues pass PC revenues.
Zuckerberg said that the company is "just getting started" making money on the mobile platforms and it would "dispel the myth" that Facebook is unable to make money outside of PCs. I like the fact that Facebook's management is increasing its focus on the mobile device market, because the number of people who use Facebook on their mobile devices keeps increasing as the number of people who use it on their PCs keeps decreasing. This is a well-known and well-acknowledged trend.
On a negative point, the company's profitable is still under question. While Facebook's revenues increased by 34% compared to the last year, the company's expenses increased by 64% in the same period. Even after excluding stock based compensation and taxes, the company still posted an expense growth of 57%. If the company can't restrain its expenditure growth, it will be difficult for the company to achieve a positive cash-flow in the long term. In fact, the company swings from a profit of 12 cents per share to a loss of 2 cents per share in the last quarter when taxes are added to the equation. The company really needs to be careful about its expenditures.
Now back to the question of whether Facebook became a buy or not. In several of my Facebook articles, I said that I would be inclined to buy Facebook if the company could figure out a way to monetize its mobile membership. I believe that the company's current achievement in monetizing its mobile members is a good start but there is still a lot of room for growth. The company has to grow its revenues simultaneously as it cuts its costs. If the company does only one of the two, things might not look too bright for it. According to the earnings call, the company increased its headcount by 40% in the last year, which will account for some of the growth in the company's expenses.
It looks like Facebook's shares find a lot of support around $19. Until it reached $19 per share, the company's share price declined very sharply. Once reaching this level, the stock price has been fairly stable. It almost looks like many big players short the stock at around $21-22 and cover their shorts at around $19 and they keep following the same pattern over and over. I am sure they will continue this pattern until it stops working. Meanwhile, there will be plenty of volatility in this company.
In my opinion, Facebook is not in the "buy" zone yet, but it is getting there at a slow and steady pace. The company is growing its mobile and gaming revenues, both of which are keys to the company's overall growth. I am cautious with Facebook because of its high expenditures. Part of the expenditures come from hiring a bunch of new people, and the other part comes from the fact that the company lost a lot of market value, and it has to allocate more shares than usual to its employees in order to keep them motivated. In the next earnings, if the company's revenue growth is significantly larger than its expenditure growth, I will consider initiating a position in this company.