5 Things to Like About Facebook's Earnings

Investors give Facebook's earnings the thumbs-up -- with good reason

Jan 29, 2014 at 7:00PM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

After a day of respite, U.S. stocks resumed their decline on Wednesday, as the benchmark S&P 500 index fell 1%, while the narrower Dow Jones Industrial Average (DJINDICES:^DJI) lost 1.2%.

In the run-up to its highly anticipated fourth-quarter earnings announcement this afternoon, Facebook's (NASDAQ:FB) stock underperformed the market, with a near 3% drop. However, that loss looks likely to reverse tomorrow, as better-than-expected results have the shares up 12% in the after-hours session.

Images

The numbers
Facebook beat Wall Street expectations by a solid margin on both revenue ($2.59 billion versus a consensus estimate of $2.33 billion) and earning per share (adjusted EPS of $0.31 vs. $0.27). The company flexed its profitability muscle in the fourth quarter, with GAAP and non-GAAP operating profit margins of 44% and 56%, respectively -- their highest levels in at least two years. That enabled the company to generate nearly three-quarters of a billion dollars in free cash flow, for a total of $2.89 billion in 2013. Facebook is quickly becoming a well-oiled profits engine.

Engagement
Starting with the first quarter of 2013, Facebook began reporting the number of daily active users above the number of monthly active users in its earnings press releases. In this latest release, mobile daily active users take precedence over monthly active users, too, which reflects the shift in the company's focus (more in a moment on the shift to mobile). While the 1.23 billion sounds extremely impressive (it's no small feat, to be sure), it's the daily active users that will drive the business, since they are the eyeballs advertisers are paying for.

On this front, the trend also looks positive, as daily active users rose 22% year-on-year to 757 million, while mobile daily active users grew 49% to 556 million. Better yet, engagement, as measured by the ratio of daily active users to monthly active users, inched up one percentage point in the fourth quarter 62% -- in other words, the number of "power-users" grew faster than those who consult Facebook occasionally.

The teen question
Recall that during the last earnings call, CFO David Ebersman precipitated a $16 billion drop in the company's market value during the after-hours trading session when he mentioned that the number of teens on Facebook had remained constant between the second and third quarters and that the number of younger teens on Facebook had actually fallen. During today's call, one of the analysts asked about teens, but management responded that there was no new data to report.

A number of studies have looked at teenagers' use of Facebook recently, and although they are often mentioned in the press under rather alarmist headlines, there is little evidence of a teen exodus (although there are indications that the way in which this demographic uses Facebook is changing).

Mobile works!
The fourth-quarter results put the last nail in the coffin of the idea that the shift from PCs to mobile devices would harm Facebook's nascent advertising franchise. That idea had dogged the stock since it became publicly traded through the first half of 2013. Last quarter, however, Facebook achieved a symbolic milestone, as mobile ad revenues made up more than half (53%) of total ad revenues.

Move deliberately and get things right
In the letter to investors he included in Facebook's IPO prospectus, Mark Zuckerberg touted the company's in-house exhortation to "move fast and break things", so it is somewhat surprising to see how just how deliberately it is implementing the rollout of video ads. This is in spite of the fact that marketers want to use video more, according to COO Sheryl Sandberg. To their credit, Facebook's management understand they need to treat the "user experience" with kid gloves (you don't want to break it!). Too many videos with too little relevance to the user is a recipe for disaster. "Quality over quantity" is the aim and this pertains to the "ad load," too (the number of ads in a user's news feed).

This is a fine example of Facebook's willingness to sacrifice short-term gains to build longer-term value -- an impressive display of managerial maturity for a platform that celebrates its 10th birthday next week. Facebook has put together a great quarter that caps a transformational year for the company, both in terms of its business and investors' perception of the business. Maintaining the focus on user satisfaction will set the foundation for healthy growth of its franchise and ensure it remains a formidable competitor for digital advertising dollars.

Better than Facebook: The one stock you must own for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends and owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers