Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Facebook, Inc. Earnings Tomorrow: Another Blowout?

When it comes to facing off against analyst estimates, Facebook (NASDAQ: FB  ) is on a roll. Can the company report another blowout quarter tomorrow?

Facebook's history of monstrous quarters
As Facebook shifts its business to mobile, it has consistently crushed analyst estimates. The average surprise factor for Facebook earnings per share in the past four quarters is a whopping 31%. On the top line, too, Facebook has been outperforming expectations. In fact, for seven quarters in a row Facebook has beat top-line estimates. Consider Facebook's most recent quarter: it posted year-over-year revenue growth of 72%, compared to expectations of growth for 60%.

Going into Facebook's second quarter, analysts have big expectations again. The consensus estimate is for $2.81 billion in revenue and $0.32 in non-GAAP EPS. This is growth of 68% and 55%, respectively.

Considering Facebook's history of recent upside surprises, it's likely that Facebook will beat estimates again.

And giving further credence to a potential beat, it's worth nothing that $2.81 billion in revenue marks conservative sequential growth compared to the sequential growth in the year-ago quarter. $2.81 billion is up 12% from Q1's $2.5 billion. In the year-ago quarter, Facebook recorded much higher sequential growth of 24%.

But here's the catch...
Facebook has to beat estimates meaningfully in order to please the Street. Why? Facebook's extremely agressive forward-looking valuation. The stock has a price-to-sales ratio of 20. Compare that to Google, with a price-to-sales ratio of 6.5. Facebook isn't just a growth stock. It's a growth stock on steroids. This sort of premium demands that a company continually exceeds expectations.

Case in point, even though Facebook crushed estimates last quarter, the stock fell in the next two trading days. To be fair, however, the stock eventually rebounded and is up 13% in the past three months. But the initial market reaction to what seemed to be a blowout quarter suggests that it takes more than beating estimates for Facebook to really impress investors.

And given the rosy outlook that is priced into Facebook stock, other key metrics will also be closely scrutinized. In a recent article I argued investors should look for mobile ad revenue to account for 62% of total ad revenue or greater; daily active users should grow to around 834 million, up from 802 million in Q1; and Facebook's engagement rate should continue its upward trend, hitting 63% or higher.

So, Facebook is expected to post some big numbers. And it likely will. But given the bullish growth assumptions priced into Facebook's stock, investors will be better off not trying to play the earnings guessing game; even if Facebook beats expectations, there are too many factors Facebook investors are scrutinizing to know how the market will react.

Instead of focusing on whether Facebook will beat estimates enough to impress the Street, simply use the expectations in this article as a way to get a pulse-check on this fast-growing business. If the company continues to meet and exceed expectations, it's probably best for shareholders to hold on to this winning company. On the other hand, if Facebook reports unimpressive results, search for an explanation in the report and the earnings call that will follow the report to see whether it is a real business concern or a blip in the social network's journey.

Most of all, investors may want to be on the lookout for a sell-off. Facebook is an excellent business, but it would be nice to get the company at a better price.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3037718, ~/Articles/ArticleHandler.aspx, 9/3/2015 3:14:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Daniel Sparks

Daniel is a senior technology specialist at The Motley Fool. To get the inside scoop on his coverage of technology companies, follow him on Twitter.

Today's Market

updated Moments ago Sponsored by:
DOW 16,396.05 44.67 0.27%
S&P 500 1,956.33 7.47 0.38%
NASD 4,748.06 -1.92 -0.04%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 2:58 PM
AAPL $110.71 Down -1.63 -1.45%
Apple CAPS Rating: ****
FB $88.30 Down -1.60 -1.77%
Facebook CAPS Rating: ***