Will Facebook's Earnings Report Trigger A Stock Price Surge?

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About: Facebook (FB)
by: Silicon Valley Insights
Summary

Facebook is scheduled to report Q3 results Wednesday afternoon.

After trading in a $160-175 range for three months, will the recent move up to $180 be followed by a post-earning surge like some other FANG stocks recently?

Will Facebook's newer properties power the upside that leads to this surge?

Facebook (FB) is scheduled to report Q3 results tomorrow afternoon. Expectations are for $9.84 billion and $1.28 and like always were made without guidance from Facebook management. These revenues would be up 40% YTY, but upside to the $10.0 billion would represent a continuation of the 45% growth seen in Q2, if not the growth rates of about 50% for the prior two quarters.

This is stellar growth for a company of Facebook’s size so it is to be expected that its growth rate gradually slows. Behind this growth should be the positives of increasingly monetizing Instagram and its other non-Facebook properties, perhaps offset by management’s year-long warning that the ad-load (the number of ads per page) growth rate on Facebook will begin to slow in H2 2017 which we are now in.

The Q2 metrics to which Q3 will be compared were:

  • $9.32 billion and $1.32, above expectations for $9.17 billion and $1.14 Those revenues were up 45% YTY, driven especially by Instagram.
  • MAUs increased 3%+ sequentially from 1.94 billion to more than 2.0 billion, up the same 17% YTY as in Q1.
  • DAUs increased 17% YTY to 1.3 billion
  • Ad revenues increased 47% YTY to $9.2 billion or 98% of total revenues, $200K above expectations. Mobile increased YTY from 84% to 87% of total ad revenues. Demand and supply for mobile ads continued robust with video ads growing. Desktop ad revenues increased 17% despite the decline in desktop usage.
  • On good operating leverage, operating margins increased sequentially from 41% to 47%, well above expectations for 43%. Those earnings were up 69% YTY including the benefit from a lower tax rate.

Last quarter, Facebook management said their focus is transitioning from connecting everyone to building communities – and increasing advertising in part via better targeting to these communities. Especially on the newer Facebook services like Instagram, WhatsApp and Messenger which along with AR received much of the focus of their recent f8 developers event. These trends have barely begun and promise to drive strong growth for many quarters and years to come.

The number of businesses with Facebook pages had reached 70 million by the end of Q2 but only 5-6 million of those advertise on Facebook. There is substantial upside potential there. 15 million businesses had Instagram profiles, a major surge YTD. Mobile ads are the future and Facebook management is providing the tools to enable them for businesses.

Facebook continues to add new features and services at a very rapid pace, perhaps faster than about any other company. Not all of them become highly popular but many do and that drives the company’s exceptional growth. Messenger and video are getting a lot of attention in terms of enhancing the services and monetize them. Ads on Messenger were just beginning in Q2 as Facebook tested what is well received and effective. It will be noteworthy to see the update here for Q3.

Since their November 2014 investor meeting, Facebook management has been saying their spending rate would be increasing and/or their ad load growth rate would be less rapid going forward, especially beginning in the second half of 2017 which it now is. Over the two years-plus since they began saying this, earnings and the Facebook share price have well more than doubled. Already on their Q2 call, their cautions appeared more muted. Their comments on tomorrow’s call relative to this and the company’s overall growth rate will be closely watched.

Based on the company’s excellent positioning and aggressive development of more and more new services, we maintain our Focus Strong Buy rating for Facebook shares.

Disclosure: I am/we are 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.