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Why Facebook Stock Soared 16% in April

By John Ballard – May 6, 2019 at 12:44PM

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The stock has been steadily marching higher all year after the sharp sell-off in 2018.

What happened

Shares of Facebook (META -1.64%) gained 16% in value last month, according to data provided by S&P Global Market Intelligence.

The social-media giant reported better-than-expected revenue growth for the first quarter, which sent the shares higher.

A hand holding a smartphone with a heart, message bubble, and thumbs-up sign hovering over it

IMAGE SOURCE: GETTY IMAGES.

So what

Here's a quick look at the highlights:

  • Revenue increased 26% year over year to $14.9 billion.
  • Earnings per share fell 50% year over year, primarily due to higher operating expense.
  • Daily active users were 1.56 billion, up 8% year over year.
  • Mobile advertising revenue was 93% of total ad revenue for the quarter. That's up from 91% in the year-ago quarter.

Facebook had a rough 2018, as concerns over privacy and security took a toll. The company has spent billions of dollars to shore up security on its platform, which has hurt profitability.

On top of that, Facebook has dealt with slowing growth. The combination of lower margins and decelerating revenue growth made a perfect storm last year, as the stock went into a nosedive.

The salve for investors has been the stock's valuation. At a price-to-earnings ratio of less than 20 at the start of 2019, there were very low expectations built in to the stock price. Facebook stock is up 49% year to date, and the better-than-expected revenue growth in the first quarter gave investors more reason to have confidence in the health of the company's ad platforms.

Now what

It's still uncertain whether Facebook will expand margins over the next year and recover earnings momentum. Management raised its guidance for operating expense, which is now expected to grow 47% to 55% in 2019. That's much faster than recent revenue growth, so it doesn't look like Facebook expects margins to recover anytime soon. The company sees the need to continue investing in safety and security, in addition to infrastructure and innovation over the long term.

Still, investors were encouraged by the progress to make Stories ads a more viable advertising channel; Facebook desperately needs to shine to keep its revenue growth up. Facebook now has 3 million advertisers using Stories ads across Instagram, Facebook, and Messenger. The company also announced Checkout on Instagram, to allow users to buy a product without leaving the app.

Currently, analysts expect earnings to fall 7% in 2019, before bouncing back by 32% in 2020.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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