Earnings are key in investing. Sure, not all companies regularly report profits. Even more, some companies lose money consistently. But at the end of the day, the intrinsic value of any stock is equal to the present value of future earnings. For more speculative stocks, profits could be just around the corner, or even years away -- or they could never come at all. However, some companies have already proven their earnings potential to investors. Better yet, every now and then, a company comes along that can grow its bottom line at downright monstrous rates.
Two of these earnings-growth machines are Facebook (FB 1.79%) and NVIDIA (NVDA +1.90%). Here's a look at what's driving profits at each of these companies, and what to expect from their earnings growth in the coming years.
|
Company |
Most Recent Quarter's Earnings Growth (YOY) |
Trailing-12-Month Earnings Growth (YOY) |
|---|---|---|
|
|
77% |
90% |
|
NVIDIA |
60% |
106% |
Data sources: Quarterly SEC filings and Reuters.
Facebook's earnings growth has been driven by a combination of revenue growth and operating leverage. In the company's most recent quarter, for instance, the social network's net income jumped 79% year over year on a 47% increase in revenue during the same period. Therefore, while revenue growth helped, it was the fact that operating expenses climbed slower than revenue that enabled such an enormous increase in net income and earnings per share during this period.
Image source: Getty Images.
Facebook's revenue growth has been powered by strong growth in users, engagement, ad prices, and ad load. But growth in ad load has slowed and is no longer meaningfully contributing to revenue growth as of the company's third quarter -- a trend management believes will reduce revenue growth rates in the coming quarters.
While Facebook's revenue growth is expected to decelerate, the social network will probably continue to grow earnings, albeit at a much slower rate. In Facebook's third-quarter earnings call, management said it expects 2018 to be "a significant investment year," with full-year operating expense growth of approximately 45% to 60% year over year. On average, analysts expect EPS to climb about 13% next year.
Of course, investors will probably be forgiving of slower earnings growth amid an aggressive investment year. After all, Facebook's net-income has reached surreal levels. Net income in Q3 was $4.7 billion, or $1.59 per share. That compares with $2.6 billion, or $0.90 per share, in the year-ago quarter.
NVIDIA
Computer graphics and deep-learning processor company NVIDIA has similarly benefited from both revenue growth and operating leverage. On 32% year-over-year growth in revenue in its most recent quarter, net income increased 55%, leading to a 50% boost in earnings per share. During this period, operating expenses increased only 24%.
NVIDIA's earnings growth has enabled the company to return to investors $909 million in share repurchases and $250 million in dividends in the trailing nine months. In addition, the company has committed to returning $1.25 billion to shareholders in fiscal 2018.
NVIDIA's revenue growth has been spurred by strong adoption of artificial intelligence (AI) many different industries, but primarily data centers, gaming, and automotive.
Like Facebook, analysts expect growth to decelerate next year. On average, analysts expect revenue and EPS to increase by about 16% and 12% next year, respectively.
While both Facebook and NVIDIA have seen mind-boggling earnings growth recently, this kind of growth can't last forever. But robust bottom-line performance like this is definitely worth looking into, and possibly worth investing in.
