Facebook Inc (ticker: FB) reported second-quarter earnings after the bell on Wednesday, and results blew Wall Street’s already high expectations out of the water. Despite the company beating estimates on both the top- and bottom-line, FB stock immediately dropped more than 3 percent in after-hours trading before rebounding to trade roughly unchanged.
[See: 7 Best Tech Stocks to Buy for 2017.]
The ho-hum price action is a change of pace for Facebook shareholders, who had watched shares gain more than 40 percent year-to-date until the Q2 report.
Facebook earnings by the numbers. Earnings per share came in at $1.32, up 69 percent from the same quarter a year ago, while revenue rose 45 percent to $9.32 billion.
Analysts expected Facebook to report earnings per share of $1.13 on revenue of $9.2 billion — so frankly both numbers were pretty impressive.
Monthly active users (MAUs) rose 17 percent to 2.01 billion, topping the 2 billion user number for the first time ever.
When FB stock went public in 2012, the social media giant’s woes with monetizing mobile quickly came to the forefront and drove the stock down to $18 a share. Today, those fears look foolish. Mobile advertising revenue accounted for 87 percent of total revenue, up from 84 percent a year ago.
Average revenue per user (ARPU) advanced to $4.73, representing year-over-year growth of 24 percent.
Facebook and Alphabet ( GOOG, GOOGL) increasingly dominate the online advertising industry. In recent years, both companies have literally accounted for 100 percent of spending increases in digital advertising.
Pros and cons of FB stock. When you buy Facebook stock, not only do you get the world’s leading social media company by a long shot — you get a portfolio of apps, too.
“While there’s still more monetization available through advertising on Facebook’s core social media app, the opportunities with Instagram, Messenger, and WhatsApp are plentiful,” says Aaron Goldman, CMO of 4C Insights, a company that helps clients measure, plan, buy and sell content and advertising.
Instagram has more than 700 million monthly active users, and WhatsApp and Messenger both have more than 1.2 billion.
“Longer-term, it’s all about AI and VR, and the model will go well beyond mere advertising to fully integrated commerce and entertainment,” Goldman says, referring to artificial intelligence and virtual reality. “As for advertising, Facebook is only scratching the surface of the converging video market, which makes the hundreds of billions in global TV budgets addressable. Clearly, there’s lots of upside for Facebook in the future,” Goldman says.
[See: 7 of the Best Cheap Stocks to Buy Under $10 .]
Not everyone is as sanguine about Facebook’s avenues for growth.
“Facebook’s future growth relies on international markets and on mobile, both of which are known to have a lower cost per click or ARPU,” says K C Ma, professor of finance at Stetson University.
“Facebook has also warned that the ad load has reached a high level that cannot be sustained,” Ma says, pointing out that the company’s rapid 40-percent-plus rate of revenue growth isn’t long for this world.
Daily versus long-term price action. Many traders were expecting a great report on Wednesday and a subsequent short-term rally in FB stock. Short interest, or the percentage of shares that are sold short by traders betting prices will fall, dropped to a 12-month low just before the announcement.
Those traders got a great report — but not the corresponding big rally they were expecting.
That’s the danger in betting how much FB — or any stock — will move in the aftermath of an earnings report. It’s like flipping a coin.
Long-term investing is far less risky and much more advisable for retail investors. And, especially after the market’s muted reaction to a pretty stellar report, Facebook shares still look like a solid long-term bet.
[See: 9 of the Market’s Best Growth Stocks.]
After all, 2 billion pairs of eyeballs will attract any advertiser, and as other social media companies like Twitter ( TWTR) struggle to grow their considerably smaller user base by even mid-single digits, Facebook is growing by double digits despite its market saturation.
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Facebook (FB) Stock Wavers Despite Impressive Q2 Earnings Beat originally appeared on usnews.com
