Facebook Shoots the Lights Out -- What's Not to Like About the Stock?

Facebook reports impressive second-quarter results, but there's still a hitch.

Jul 23, 2014 at 7:00PM

The march to 2,000 continues for the S&P 500! U.S. stocks finished higher on Wednesday, with the benchmark S&P 500 achieving a new record high off an 0.2% gain. Meanwhile, the narrower Dow Jones Industrial Average (DJINDICES:^DJI) fell 0.2%, while the technology-heavy Nasdaq Composite Index (NASDAQINDEX:^IXIC) was up 0.4%. And speaking of all-time highs, shares of Facebook (NASDAQ:FB) rose 2.9% today in the run-up to this afternoon's second-quarter results, and they're rising yet further in the after-hours session, hitting a record high in the process -- something that ought to be replicated during tomorrow's session.


In reviewing Google's (NASDAQ:GOOG) second-quarter results last week, I highlighted that Facebook is growing its mobile advertising revenues faster than the search colossus. Today's numbers from Facebook illustrate that phenomenon and helped the social networking company power ahead of Wall Street's expectations:


Actual/Year-on-Year Growth

Analysts' Consensus Estimate


$2.9 billion


$2.8 billion

Earnings per share




Sources: Facebook, Thomson Financial Network.

In the second quarter of last year, Facebook beat expectations and simultaneously put to rest fears that its advertising franchise might not successfully negotiate the transition from PCs to mobile devices. One year on, and the evidence is that the business has gone from strength to strength, with mobile advertising now contributing 62% of total ad revenues, up from 41% in the year-ago period. Facebook ate up one-fifth (18%) of the global advertising market, according to research firm eMarketer, which is forecasting that proportion to grow to 22% this year.

The motor of mobile advertising contributed to the 61% year-on-year growth rate in total revenues -- superb performance for a company that size. (However, note that in the second half of 2006, when Google hit the same level of quarterly revenues, its year-on-year growth rate was a bit higher, at roughly 69%.) Combine that with improved margins -- all four major cost categories were lower as a percentage of revenues than they have been in the prior four quarters -- and you have a recipe for the "pop" in profits.

Given these stellar numbers, is there anything for investors to dislike about Facebook? The main problem I have is not with the business itself, but with the valuation the market is assigning to that business. At 39 times the earnings-per-share estimate for 2015, the shares don't have a margin of safety (or, rather, the margin of safety is negative -- a "margin of danger"). Perhaps the company will continue to grow at a pace that will see that concern off in time, but that is the assessment of this value-driven investor today.

Warren Buffett's worst auto-nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this megatrend. Click here to access our exclusive report on this stock.

Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Facebook, Ford, Google (A and C shares), and Tesla Motors. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.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.

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