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Mark Your Calendar: Facebook, Inc. Earnings

By Daniel Sparks – Jul 8, 2016 at 7:18PM

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Can the social network deliver yet another quarter of monster growth?

On Wednesday, July 27, Facebook (META -0.74%) will report second-quarter results. When the numbers go live, investors will look to see whether the social network has continued doing what it is already doing: rapidly growing sales and profits. Ahead of Facebook's second-quarter results, here's what investors need to know.

Facebook CEO Mark Zuckerberg. Image source: Facebook.

It's all about growth

For Facebook to continue justifying its stock price, it will need to keep growing rapidly. Otherwise, investors may doubt the stock's wild valuation, which sports a price-to-earnings ratio of 72, and price-to-sales ratio of 17. To illustrate just how richly valued Facebook stock is, compare it to Alphabet (GOOG -1.24%) (GOOGL -1.02%), the holding company of Google, which has price-to-earnings and price-to-sales ratios of 29 and 6.2, respectively.

Fortunately, Facebook has had no problem impressing investors with its growth. For two quarters in a row, the social network has reported year-over-year revenue growth of 52% -- both coming in higher than analyst estimates. And the social network's GAAP and non-GAAP profits are soaring, up about 195% and 83%, respectively, in Q1, when compared to the year-ago quarter.

Comparing this recent growth to Alphabet's, it's easier to understand why the market has rewarded Facebook stock with such a significant premium. Google's revenue, GAAP net income, and non-GAAP net income increased 17%, 20%, and 18%, respectively, in Q1 -- solid performance, but far from the level of growth Facebook is experiencing.

Facebook app. Image source: Facebook.

Beyond financial metrics, investors will likely look to the growth in some of Facebook's key user metrics.

  • Monthly active users: Facebook had 1.65 billion monthly active users in Q1, up 4% sequentially, and 15% year over year. Look for similar sequential growth in monthly active users this quarter.
  • Daily active users: The number of users who used Facebook every day in Q1 was 1.09 million daily active users, up 5% sequentially, and 16% year over year. Again, look for a similar sequential increase for this metric in Q2.
  • Users on Facebook's other platforms: In Q1, Facebook said its other large social platforms, WhatsApp, Messenger, and Instagram, had garnered 1 billion, 800 million, and 400 million monthly active users, respectively. Look for an update from Facebook on where these younger social networks stand. Notably, Facebook provided an early update on Instagram, saying it had hit 500 million monthly active users, and 300 million daily active users, in June.

Expectations

Unsurprisingly, analysts have big expectations for Facebook's second quarter. But the consensus estimate for the social network's revenue and EPS growth does bake in somewhat of a deceleration.

On average, analysts expect Facebook to report second-quarter revenue of $6 billion, up 48.5% from the year-ago quarter, and 11% sequentially. This compares to Facebook's 52% year-over-year revenue growth in Q1.

The consensus estimate for Facebook's non-GAAP EPS is $0.81, up 62% year over year, and 5% sequentially. This is a meaningful deceleration compared to Facebook's 83% deceleration in Q1, but it's not surprising analysts are anticipating EPS growth to slow.

Facebook CFO David Wehner said during the company's fourth-quarter earnings call that it expected non-GAAP expenses to increase 45% to 55% during the year as it makes significant investments across its business throughout the year. Rapidly rising expenses, therefore, could weigh on EPS growth as revenue growth decelerates.

Overall, investors should look for Facebook's second-quarter report to indicate its rapid growth story remains intact.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. We Fools may not 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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