Facebook earnings – spectacular growth at a cheap price

Facebook’s Q3 earnings promise excellent growth, with the promise of more to come if it can boost user revenue outside North America. With the current valuation at a record low, the shares look compelling on both fundamental and technical viewpoints. 

Source: Bloomberg

Facebook’s third-quarter earnings come out on Wednesday after the closing bell. We are expecting to see earnings of 97 cents per share, up 70% year-on-year, while revenue is forecast to rise 54% to $6.9 billion. Although the first-quarter of 2016 saw a dip in both sales and earnings, the broader trend for Facebook is still firmly upwards. Data from Bloomberg indicates that the average stock move on the day is 5.2%, while current options activity suggests that the upcoming figures will see a 6.25% move.

Engagement metrics such as daily and monthly active users (DAUs and MAUs respectively) suggest that we will see growth of 4% in these figures, in line with the second quarter’s performance. It will be important to watch Facebook’s advertising revenue growth, which is its main source of revenue. This rose 60% in the first-half of 2016, to $11.4 billion, while mobile ad revenues make up a remarkable 83% of total advertising revenues.

Facebook has long been noted for its cash generation. In the first six months of 2016, free cash flow rose 60%, despite a 100% increase in capital investments. Like Amazon therefore (and tellingly, unlike Twitter) Facebook has the cash to spend on new ventures, safe in the knowledge that it has the underlying business to sustain these experiments.

We should also keep an eye on the average revenue per user (ARPU), which outside the North American base contributes just 25% of revenues (in North America, the figure is 50%). Given that 87% of Facebook’s users are outside North America, the fact that ARPU for this metric was just $1.13 versus $14.34 for the US and Canada shows the huge potential for revenue and earnings growth, if Facebook can find a way to tap into this.

With a company like Facebook, whose share price is fuelled by expectations of future growth rather than just pedestrian considerations of current performance, valuations may be somewhat moot. However, it is trading at just 26.5 forward earnings, which is positively cheap compared to its longer-term average of 34.6.

The share price chart since July of 2013 is just one long uptrend, with a ‘buy the dip’ mentality working over and over again. At present, with the price above the 50-day simple moving average (SMA) of $128.56, the rally goes on, but ideally a dip towards $120 and the 200-day simple moving average would provide a more attractive entry point.

The company is thus looking compelling from both a fundamental and technical standpoint. Barring a major disappointment in its Q3 numbers, the stock looks set for further gains. 

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