Facebook Inc (ticker: FB) stock has been one of the market’s hottest large-capitalization growth names for years now. Some trade groups estimate Facebook and Alphabet ( GOOG, GOOGL) accounted for 103 percent of ad spending in the first half of 2016 — meaning the rest of the industry was in decline.
Shares of FB are up 321 percent in the last four years, outperforming the 54 percent returns of the Standard & Poor’s 500 index by nearly a factor of six. It’s also morphing into a pure media company, something that has given shareholders new opportunities and risks to consider.
[Read: Alphabet Stock Will Keep Marching Toward $1,000.]
Shares, which are already up 15 percent in 2017, will have another catalyst-inducing event on the afternoon of Wednesday when Facebook reports fourth-quarter earnings.
What should FB stock owners look for?
How to approach Facebook earnings. Numbers-wise, analysts expect revenue to jump 45 percent to $8.49 billion. Wall Street expects the Menlo Park, California-based giant to post earnings per share of $1.31, up 66 percent from the same quarter a year ago.
Growth figures like that are pretty stellar, and for a company the size of Facebook, which has a $381 billion market cap, they’re almost unheard of. Still, compared to prior quarters it’s actually a deceleration. In the third quarter, revenue rose 59 percent and earnings soared 165 percent.
“Based on previously released guidance, Facebook has already indicated that revenue growth rates are cooling off, especially Q4 year-over-year comparisons,” says Mike Smerklo, co-founder and managing director at Next Coast Ventures.
It’s only natural for growth to taper down as companies grow, and when the comps are tough (the fourth quarter of 2015 was stellar) it’s even more routine. So the consensus numbers aren’t anything FB stock owners should lose sleep over.
While beating either revenue or EPS estimates would be great, there are a few other things to look for in the Facebook earnings announcement. Specifically, user growth and ad growth.
“Introducing new ‘mid-roll advertising’ is another way to engage users, and will increase ads revenue,” says K C Ma, professor of finance at Stetson University.
Ad growth has been driven by growth in mobile for years now, and in the third quarter, 84 percent of all ad revenue came from mobile. That said, mobile’s growth rate has definitely peaked. However, “growth drivers are still intact,” Ma says.
“Instagram for video ads and monetizing Facebook Messenger and Whatsapp” should help fuel growth in the fourth quarter and beyond, he says.
Facebook will likely cross 1.8 billion monthly active users for the first time ever in the fourth quarter. In stark contrast with Twitter ( TWTR), continuous MAU growth has been a point of pride for the company and a driver for FB stock. In the third quarter, MAUs grew by 15.7 percent year-over-year. At Twitter, that number was 3 percent, despite Facebook’s user base being more than five times larger.
Impressive stats like these have made Facebook shares expensive — but not too expensive.
“It’s got an attractive valuation at 25 times forward 12-month earnings, which are expected to grow 26 percent in calendar year 2017,” says Tara Hedlund, senior vice president with Pennsylvania Trust.
Looking forward. While ad growth and user growth are always in focus, what investors fundamentally care about is the future. So any forward guidance on the first quarter or full-year 2017 will be very important to dissect.
Thankfully, investors know a few things already.
In November, “Facebook announced a $6 billion share repurchase program for Q1 2017. This could provide support for the stock,” Hedlund says.
Facebook Video has also been an important catalyst for FB stock recently. Google‘s YouTube is no longer the de facto online video hub. And Instant Articles have taken the online publishing world by storm and changed the digital media landscape entirely.
Going forward, virtual reality and augmented reality could be new avenues for growth, but that’s a ways off.
[Read: The 10 Most Anticipated IPOs of 2017.]
“VR/AR tech is expected to generate $120 billion by 2020,” Ma says. “But right now it’s a small part of Facebook’s operations. Many analysts don’t even include Oculus in top or bottom line estimates.”
More money, more problems. Facebook’s metamorphosis into a media company hasn’t all been smooth sailing. Perhaps the biggest blip has been the fake news phenomenon, which some in Congress blame for influencing the election outcome.
Facebook is testing a new way to address this with third-party fact-checkers. While the fake news issue may have enormous implications for the republic, it hasn’t (yet) caused people to stop posting their baby pictures. Therefore the impact on FB stock has, to date, been minimal.
Something far more concerning for shareholders is a string of announcements from Facebook regarding misreported metrics. Since September, the company has acknowledged three instances where it had misreported performance metrics to advertisers.
In one instance, “average time spent reading articles was over-reported by 7 to 8 percent and traffic was under reported by 10 to 20 percent. The end result is to mislead advertisers on viewership or success of their advertising,” Ma says.
“Even though none of these were done nefariously, it puts all of Facebook’s data and metrics into question,” he says.
The fallout from these admissions has been surprisingly muted; FB stock is trading roughly where it was for most of September.
Another potential issue for Facebook shares is Snap, the parent of the wildly popular ephemeral messaging app Snapchat. A Snap IPO is expected in the first quarter, and some think that institutional investors could shift money from FB into Snap, a company Zuckerberg tried to snap up in 2013 for $3 billion.
Still, onlookers doubt a Snap Inc IPO will damage FB too dearly. “Snap’s IPO is ambitiously valued between $20 and $25 billion,” Ma says, while 2016 ad sales have been estimated at under $370 million.
Snapchat, for what it’s worth, has no confusion about its identity: it’s a media company, monetizing through video and graphic-heavy ads on its platform.
The fact that the vast majority of investors consider Snapchat and Facebook competitors challenges the common conception of FB a tech stock. Isn’t it really more a media company itself?
“I think the official policy is to deny that,” Peter Thiel recently said in a New York Times interview.
[See: 7 of the Best Stocks to Buy for 2017.]
Media company or not, mind the growth numbers — and the way Facebook frames its future outlook.
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Can Facebook Inc (FB) Stock Start 2017 With an Earnings Bang? originally appeared on usnews.com
