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

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:

Metric

Actual/Year-on-Year Growth

Analysts' Consensus Estimate

Revenues

$2.9 billion

+61%

$2.8 billion

Earnings per share

$0.42

+121%

$0.32

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.


Read/Post Comments (3) | Recommend This Article (6)

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.

  • Report this Comment On July 23, 2014, at 7:49 PM, markpatel wrote:

    what margin of safety are you looking for its a monopoly actually - 2 solid quarters into the year and yet big parts of the company are nor even monetized

  • Report this Comment On July 24, 2014, at 8:39 AM, MayTepper wrote:

    Facebook Remains Our Top Pick Following Better Than Expected Quarter Earnings, Says Topeka http://bit.ly/1z7m0tw

  • Report this Comment On August 11, 2014, at 12:05 PM, pete163 wrote:

    I look a FB as the Dot Coms, it's a bubble. The same with tweeter, both are bubbles that are going to crash. And when it does everyone will be screening the market is rigged, then they will be jumping out of windows.

Add your comment.

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: 3041805, ~/Articles/ArticleHandler.aspx, 9/19/2014 2:14:14 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...


Advertisement