Why Students And Investors Disagree About Facebook

| About: Facebook (FB)
This article is now exclusive for PRO subscribers.

Facebook (NASDAQ:FB) is set to report FQ4 2013 earnings after the market closes on Wednesday, January 29th. Over the past couple of quarters, Facebook has blown analyst expectations out of the water, and the stock has gone crazy more than doubling. However, a few recent high-profile studies have begun to sound the alarms on the social network and claim that it’s already in decline. A recent paper out of Princeton, which studied the growth of Facebook, claimed that it "spread like an infectious disease" and said it would also die like a virus, losing 80% of its users by 2017.

Another equally doomsaying study released in December by researchers at University College London has stated that Facebook is “dead and buried” for teens and that it’s “simply not cool any more”. Regardless of these publications, the fact is that Facebook has grown both its EPS and revenue on a year-over-year basis in each of the past 8 quarters, and as of September 2013, Facebook touts 847 million active monthly users. Here’s what the buy side and students expect from Facebook’s earnings report on Wednesday, and how they differ.

The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors.image

(Click here to see All Estimates for Facebook)

Over the previous 6 quarters, the EPS and revenue forecasts from Estimize.com have been more accurate than Wall Street 4 and 5 times respectively. By tapping into a wider range of contributors, including hedge-fund analysts, asset managers, independent research shops, non-professional investors, and students, Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market’s actual expectations. This quarter there is significant disagreement between students and the buy side.image

This quarter the students, represented by green dots on the scatter plot above, have taken a more bearish view of Facebook than the buy side in red. This could mean one of a few things. Students may have made lower estimates based on their experience with a shrinking user base and decreasing engagement. On the other hand, the buy side could simply have higher expectations from Facebook’s capacity to monetize. Over the previous 6 quarters, Facebook has met or exceeded Wall Street expectations on both EPS and revenue in each quarter, and investors may be taking this information into account.image

The distribution of estimates published by analysts on the Estimize.com platform range from 25c to 33c EPS and $2.200B to $2.560B in revenues. This quarter we’re seeing a moderate distribution of estimates compared to previous quarters.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A wider distribution of estimates signals less agreement in the market, which could mean greater volatility post earnings.image

This quarter we’ve seen upward analyst revisions from both Wall Street and Estimize. The Wall Street EPS consensus has increased throughout the quarter from 23c to 27c while the Estimize consensus for EPS has inched higher from 28c to 29c. Wall Street has also increased its revenue forecast throughout the quarter from $2.221B to $2.355B while the Estimize community has revised its consensus upward from $2.303B to $2.366B. Timeliness is correlated with accuracy, and rising analyst revisions going into a report is often a bullish indicator.image

The analyst with the highest estimate confidence rating this quarter is WallStreetBean, who projects 29c EPS and $2.402B in revenue. In the Winter 2014 season, WallStreetBean is rated as the 15th best analyst and is ranked 9th overall among over 3,600 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case, the analyst with the highest-rated estimate is making a bullish call predicting that Facebook will report in line with Estimize on profit but exceed on revenue.

This quarter the aggregate consensus from the Estimize community is that Facebook will beat Wall Street expectations on both EPS and revenue. However, the buy side is more optimistic than the students. Wednesday evening after the dust settles we will know which side was right.