Facebook Q1 earnings preview – Can the strong momentum continue?

I posed the question this time last year whether Facebook (FB) was a future $150 stock and it seems that is the case.

Market data
Source: Bloomberg

Traders and investors now look forward to 4 May, where FB report Q1 earnings at 6.00am AEST and right on the close of the US cash markets. This will be a highly anticipated release, not just because of the strong trend we have seen in FB’s share price through 2017, but also because the implied move on the day of earnings (as priced in the options market) is a sizeable 4.1%. Short-term traders love volatility, and FB tends to deliver this.

Investors love to hold equity in companies that have a history of not surprising shareholders, but also have a pedigree of beating expectations, both for the current period, but also in their guidance for future sales, margins and operating environment. FB have that pedigree, having beaten the consensus earnings per share (EPS) for 15 straight quarters and seven on sales. That being said, we have actually seen FB share price fall for the past two quarters on the day of reporting, so there are always other things that need to inspire to keep the share price appreciating.

Expected earnings and revenue numbers
In terms of expectations on the numbers and the numbers market participants may key off. Q1 net profit after tax (NPAT) is expected to come in at $3.26 billion, on revenue of $7.821 billion (-11.2% q/q and +45% yoy). We can drill down and see the market is also looking for $6.601 billion in mobile ad revenue, so again we see a company that is doing a great job of monetising its mobile platform. Importantly, traders should also listen out for guidance on Q2 revenues, with the market expecting a strong quarter pushing up to $9.02 billion. Gross margins are also expected to increase to 86.60%, from an expected 86.15% in Q1.

The market also expects a 10% increase in free cash flow generation, although that cash flow is, as always, ploughed straight back into the business and put to work in capital expenditure (CAPEX). This is of course how we see such strong year-over-year growth. With the levels of growth FB provide, we are not expecting management to start returning cash to shareholders through dividends for a number of years.

User statistics are always of keen interest, with analysts forecasting a 47% increase (yoy) in Monthly Active Users (MAU). 1.9 billion MAU’s is just such a staggering statistic.

The question of what will drive the share price higher from here comes into play and especially for those more optimistic calls from analysts of $180 over the coming 12 months. Expense guidance is certainly one area where FB can boost the bottom line and grow EPS, but one suspect’s product innovation is where investors see new or enhanced revenue streams coming on board in the years ahead.

It does concern me that the market goes into this release extremely bullish on this name and despite FB being a brilliant business, one suspects that FB is also feeding off the strong moves in the broader NASDAQ 100 (US Tech 100 on Puredeal) of late. One has to consider that some 87% of NASDAQ 100 companies (at the time of writing) have beaten expectations on EPS and 65% on the sales line. We have even seen 20.3% aggregate earnings growth. Technology and on-line marketing is where the more momentum-focused traders are putting money to work at present.

FB a ‘buy’ into $140
Given this strong trend, I wouldn’t be surprised to see price fade into the result. However, on the information we currently know FB looks like a buy into $140, although I would also run a stop on the trade below the 22 March low of $137.60. $180 seems a long way off, but good numbers and an outlook at suggests the Q2 consensus is on the light side and we could see $160 to $165 come into play soon enough.

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