Facebook earnings (Shutterstock photo)
Facebook (FB) will report third quarter fiscal 2017 earnings results after the closing bell Wednesday.
Facebook shares, until the recent rally in tech, had done very little since the company reported second quarter results. The stock has risen just 3% in the past three months, compared to an almost 5% rise in the S&P 500 during that span. Valuation concerns have emerged as FB stock is now trading at 33 times fiscal 2017 estimates of $5.34 per share, compared to a forward P/E of 19 for the S&P 500 index.
That alone, however, doesn’t necessarily makes FB expensive. Not only does the full-year estimate assumes year-over-year EPS growth of more than 26%, it marks a growth acceleration of almost ten percentage points since the start of the quarter. So, as profit estimates rise, it makes sense for the share price to rise accordingly. In this case, the profit estimate has risen at a faster rate — 10 percentage points versus 3% stock growth in three months.
As such, those who have called for “Peak FB” may be silenced, especially if Alphabet’s (GOOG, GOOGL) dominant Q3 results — owing to stronger digital advertising revenue — serve as indication. Facebook is poised to blow its own results out of the water. For the three months that ended September, the Menlo Park, Calif.-based company is expected to earn $1.28 per share on revenue of $9.84 billion, translating to year-over-year growth of 17.4% and 40%, respectively.
For the full year, ending in December, earnings are projected to rise 26% year over year to $5.34 per share, while revenue of $39.24 billion would rise 42% year over year. But the top- and bottom-line numbers are just part of the story. On Wednesday, Wall Street will have its eyes on the company’s growing user base — an area where Facebook seems to crush despite how massive its worldwide user total (now above 2 billion) appears to be.
The company ended the second quarter with 2.01 billion monthly active users, marking a 17% year-over-year increase. Notably, the growth arrived even as analysts warned that North American and European markets had approached full penetration. Efforts to drive higher user engagement appears to be working. But on Wednesday Facebook’s own commentary about its slowing growth rate, particularly with ad loads may dictate the direction the stock takes.
The company, instead, is focusing on ways to drive higher engagements with videos and its new subscription platform, which in turn, can generate higher revenues. These initiatives are aimed making the ad business, which grew 47% in Q2 accounted for 99% of its overall revenue, more sustainable and profitable. Elsewhere, Wall Street will want assurances that Facebook has strategies to fight off the emergence of Snap (SNAP) and, to a lesser extent, Twitter (TWTR).
To that end, increased excitement about Instagram, which last quarter topped 800 million monthly active users, will play a great role. The Street will also want to know the company’s plans to monetize Messenger and WhatsApp, which have both topped one-billion monthly active users. And given the company’s track record of breathtaking numbers, these shares could easily break above $200 by the end of next week, making FB stock a solid bet ahead of Wednesday’s results.