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Facebook Inc Earnings: This Bombshell Report Suggests Further Upside

Adobe published a first-quarter social media report on Monday night that bodes well for Facebook's upcoming earnings report. If the statistics in Adobe's report translate into financial results at the time of the report, Facebook (NASDAQ: FB  )  shareholders will be in a very good position. Facebook has made two Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) -like acquisitions in the quarter that have not had a clear tie to profit growth, which led investors to question management's motives. Could Facebook's growth accelerate from here?

Facebook is reporting Wednesday -- expectations are high
Facebook is reporting earnings Wednesday after the close, and expectations for the company remain high. The consensus earnings estimate for the quarter is $0.24, but estimates have been increasing. For the full year, analysts are expecting $1.19, according to Morningstar, which implies a price-to-earnings ratio of 53. This seems high considering the massive market cap at $160 billion.

Adobe's Social Media report implies a strong quarter
However, if the Adobe report is correct, the stock could have room to run. Some of the key findings that Facebook investors might be interested in include click-through rates that are up 160% year-over year, ad clicks up 70% year-over-year, and a 75% market share for retail site referrals. Adobe began publishing the social media report in the third quarter of 2013 based on its internal compilation of marketing statistics that it puts together for thought leadership.  

Does "cool" matter to teenagers?
Facebook has received negative press over the last two quarters for not being the cool place for teenagers to congregate. Although the teenage market may be viewed by marketers as a key demographic, that does not suggest that cash flow growth will stall and numbers like these would put a doubting advertiser's minds at ease.

Adobe's report may highlight a gap between expectations and reality
The trick when it comes to investing is to detect changes in revenue and profit growth before they flow through to the financial results. That's the point where analysts and portfolio managers change price targets and upgrade stocks. Since the only numbers that put investors minds at ease are improving profit growth statistics, there is a lag between the company fundamentals and moves in a stock price.

Facebook has been freely spending capital
This may be a show me quarter for Facebook since Mark Zuckerberg has been spending the company's capital on acquisitions in a similar fashion to Google. The only problem is that the company hasn't yet proven that its cash flow is as sustainable as Google's. Google's purchase of YouTube is the poster child of an acquisition that people didn't understand, but which worked out well longer term.  Google acquired YouTube for $1.6 billion in 2006 and generated $5.6 billion in revenue for Google in 2013.

Considering the WhatsApp and Oculus VR acquisitions, the company has spent over $20 billion dollars of capital in the last two months. To put this in perspective, the IPO only raised $18.4 billion, raising questions about the company's acquisition strategy. Is Facebook making these acquisitions because growth is being tapped out, or because there is a long term strategic benefit to entering these new markets of messaging and virtual reality?

Success resolves arguments, though, and an earnings beat would go far to ease investor concerns. While we wait for Facebook's results on Wednesday night, this report will help build anticipation.

Editor's Note: The earlier version stated Google bought YouTube for $1.6 million. That's incorrect, it was $1.6 billion. The Motley Fool apologizes for the error.

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Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On April 23, 2014, at 11:24 AM, EquityBull wrote:

    You have an error:

    "Google acquired YouTube for $1.6 million"

    change that million to billion

  • Report this Comment On April 23, 2014, at 12:54 PM, dpelleratgmail wrote:

    EquityBull, Thanks for catching that mistake!

  • Report this Comment On April 24, 2014, at 10:27 AM, Optimist2014 wrote:

    Beat estimates, EPS by 40% and yet the stock is down! How does this market work? No Clue!! :(

  • Report this Comment On April 24, 2014, at 12:51 PM, dpelleratgmail wrote:

    Optimist2014, dont worry about short term moves Facebook is rapidly turning into a cheap stock. I've come to believe that a person should do their homework on companies, put together a buy list with levels and wait for something goofy to happen that presents a buying opportunity. You're not alone

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David Eller

I started contributing to the Motley Fool in 2013. I have held research positions at two investment banks and two hedge funds before trying more entrepreneurial ventures. I'm passionate about helping people find freedom in financial independence. Feel free to add comments and start a discussion. I hope to use these articles as forums to learn from you as well as share my opinion.

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