Facebook Earnings Preview: Still Trading At Discount To Perceived Intrinsic Value

| About: Facebook (FB)
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Facebook (NASDAQ:FB) reports after the bell on Wednesday night, July 24th, 2013 with analyst consensus expecting $0.14 in earnings per share (EPS) on $1.62 billion in revenue for expected year-over-year (y/y) growth of 17% and 37% respectively.

Normally at least this earnings season anyway, we've written about more of our value holdings, or names that have lagged the market and we are trying to identify the catalyst that might push the stock forward, but FB is one of our growth holdings, that has also been stuck in neutral.

In Q1 '13, FB reported 38% revenue growth, 35% EBITDA growth and 20% EPS growth, as EPS continues to be hurt by sharp increases in operating expenses. Q1 '13 also saw the best advertising revenue growth in a year, driven by mobile's +22% gain, even though desktop was flat.

While monthly average users (MAU's) and daily average users (DAU's) growth rate has slowed into the mid 20% range year-over-year, "mobile-only" users grew 128% in the March '13 quarter.

FB is an "investment phase" right now similar to what Amazon started a few years ago, so we are fully expecting revenue growth to exceed EPS growth for some time, at least through year-end 2013.

Because we are focused on revenues, here is the trend in revenue revisions over the last 15 months:

FB's Revenue Revision History since April '12

2013 rev


2014 rev




7.23.13 $6.73 $8.50 26%
6/13 $6.73 $8.51 26%
4/13 $6.65 $8.44 27%
1/13 $6.66 $8.47 27%
10/12 $6.40 $8.1 27%
7/12 $6.34 $8.3 31%
4/12 $6.76 $9.0 33%

* Source: ThomsonReuters

It is clear that revenue expectations were too high after the IPO, but now that there is a clearer path around both mobile and advertising (and mobile advertising), the revenue run rate has settled into the mid 20% range.

There is nothing cheap about the stock in terms of its valuation.

FB currently sports a 46(x) 2013 P/E for expected EPS and revenue growth in 2013 of 8% and 32% and a 33(x) P/E ratio for expected growth in 2014 of 37% and 26%.

This is a high-multiple growth stock for sure.

One positive I like is that sentiment has turned on FB: the sentiment coming into earnings is poor as investors are turned off by the valuation and flat return year-to-date return on the stock, versus the 18% year-to-date return on the S&P 500.

It is no mystery that the Big 3 in technology today, is Mobile, Social and Cloud, and FB is very much a winner in social tech. That being said can an edge be maintained and can FB continue to convert users into a successful advertising revenue model, without scaring users away.

Three metrics we are listening for tomorrow:

1.) Advertising revenue, specifically mobile ad revenues;

2.) Mobile only users growth rate;

3.) Desktop ad revenue growth - flat in Q1 '13

FB is a scary stock, but we think management is in the early stages of executing around the advertising and mobile strategy.

Morningstar has an intrinsic value on FB of $34 per share so the stock is currently trading at a 25% discount to what is usually a conservative intrinsic value estimate.

Disclosure: I am long FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.