Earnings season is here. And that means the biggest players in the market are getting ready to release very important earnings reports. One of those big players is Facebook (FB). The social media giant is set to report first-quarter numbers after the closing bell tomorrow.
Currently, expectations embedded into the growth narrative seem reasonable, and the stock is recovering from a relatively low base with earnings growth to fuel the upside in the stock. Analysts anticipate Facebook to report Q1’19 revenue of $14.97 billion and $1.63 dil. EPS.
Facebook stock has rallied 40% year-to-date, which was driven by a number of factors tied to weakening growth outlook, market correction and issues around privacy. Notwithstanding some of the issues from a public perspective, the company is still anticipated to grow revenue by 25% this quarter, and the company trades at 23.97x times earnings, which makes it heavily undervalued when compared to other companies that trade at way higher of a growth premium.
Should You Count on Facebook Earnings to Push the Stock Higher? Top Analyst Weighs In
Ahead of the print, Wedbush Analyst Michael Pachter reiterates his Outperform rating and $200 price target on Facebook stock.
“Our estimates are for revenue of $15.13 billion and EPS of $1.92 vs. consensus of $14.97 billion and $1.63. We anticipate global sequential MAU growth in Q1 of approximately 47 million, down slightly from growth in Q4 of 49 million, and compared to growth in Q1:18 of 67 million. We estimate that global sequential DAU growth of 49 million will slightly outpace MAU growth, as engagement growth across territories will likely be balanced against muted audience growth in developed countries, given the existing size of Facebook’s MAU bases across the U.S., Canada, and Europe. Our revenue growth estimate of 26% year-over-year compares to growth of 30% in Q4, and guidance for a mid-single digit decline relative to the Q4 rate.”
Pachter anticipates that Facebook will deliver a meaningful earnings beat when compared to consensus expectations, as the firms EPS target implies a $0.29 beat on EPS expectations. User growth will slow but given Facebook’s impressive base of users they certainly have runway to deliver on ARPU (average revenue per user) metrics internationally, as ad pricing is lower in the international segment, and opportunities to monetize users in other formats could be introduced to keep advertisers engaged with the self-serve platform along with a host of new ad-inventory for monetizing messenger and Instagram stories impression growth.
Pachter also mentioned in his report that operating expenses likely to trend lower than what management offered as guidance. It could be the case, that Facebook did sandbag expectations tied to cost ramp, as it’s difficult to anticipate why such a spending increase is justified given the estimated 40,000 headcount additions. A less aggressive spending ramp could be in the cards, as it’s difficult to scale a workforce that quickly, as you would need to increase office leasing activity, have an enlarged pool of qualified applicants, and integrate those new workers into the company effectively. This might sound ironic, but this is the same type of activity that got Twitter into a lot of trouble with over-spending several years ago before Jack Dorsey took over and had to announce two layoffs during the past couple years.
Some of the spending increase could be tied to project related spending, but even that seems like a bit of a stretch given the cost of a project is tied to the amount of labor needed to work on the project. When looking at prior-year hiring activity, Facebook hired 10,000 people worldwide. So, they would need to hire at 4x the rate of prior-year to match the expense guidance, which just doesn’t seem feasible given the rate at which the organization has scaled.
Not to mention, Facebook’s commercial office leasing activity doesn’t match the pace needed for 40,000 workers in the current fiscal year, so if anything, Facebook is positioned to ramp spending at a more modest pace than its 40% to 50% anticipated growth in operating expenses this year.
Overall, investors should anticipate a solid earnings report (likely more profitable), and even if growing headcount is a priority, we shouldn’t anticipate much more than perhaps 20,000 additional hires this year given pre-existing leasing activity in various areas around San Francisco, Seattle, Chicago and New York.
Sentiment ahead of Facebook earnings bodes well. This “Strong Buy” (according to TipRanks) stock has received 34 ‘buy’ ratings in three months vs. 6 ‘hold’ and one ‘sell’ ratings. (See FB’s price targets and analyst ratings on TipRanks)
Disclosure: The author has no position in Facebook stock.