Facebook, Inc. Earnings: Newer Highs in Sight?

Facebook's business is growing rapidly, and as a result there might be more upside after the company's earnings.

Ishfaque Faruk
Ishfaque Faruk
Jul 23, 2014 at 10:20AM
Technology and Telecom

Facebook's(NASDAQ:FB) revenues and earnings have been on the upswing in the last few quarters. The company has made big strides in its efforts toward monetizing its mobile user base and acquired a number of lucrative technology companies. Going forward, the company should deliver robust bottom line numbers and that will drive Facebook's stock price higher.

Solid business momentum
Facebook's user engagement levels are at record-highs, and as a result the company's revenues and earnings are seeing solid growth. In the last quarter, Facebooks daily active users increased 21% year-over-year to 802 million. As a result, the company saw accelerating revenue growth to the tune of 72% in the last quarter. And if those impressive user growth numbers continue, Facebook's topline and EPS should see strong year-over-year increases in Q2 2014. 

Facebook average revenue per user, or ARPU, in the last quarter stood at $2.0, a 48% year-over-year increase and should continue to see its upward trajectory. This surge in revenue per user was partially driven by the company's ad pricing strategy. In the last quarter, price per ads increased 118% year-over-year but total ad impressions decreased 17% year-over-year. So the company is selling higher quality ads on its news feed at better prices as opposed to selling lower priced ads on the right hand rail. 

The social media giant enjoys very high operating profit margins to the tune of the 43%-44%, and as a result, a significant portion of the company's future revenue growth will be flowing through to the Facebook's bottom line and in the process propel the company's stock price higher. 

Mobile advertising fortunes
Facebook has managed to become a "mobile first" company just like its social media counterpart Twitter(NYSE:TWTR). In Q1 2014, mobile ad revenues made up roughly 59% of Facebook's total ad revenues, whereas Twitter earned 80% of its total revenues from mobile. As a result, Facebook should see a higher proportion of its total revenues coming from mobile devices. 

Facebook has significant room for growth with increasing mobile market share. According to eMarketer, Facebook is estimated to have a 22.3% market share of the $32.7 billion mobile advertising market worldwide in 2014, and its market share has risen annually in the past few years. Twitter on the other hand, should see its market share in mobile ad space rise to 2.8% in 2014.


Newer fields
In addition, Facebook has made string of acquisitions in the first half of 2014 which included WhatsApp, Oculus VR and LiveRail. WhatsApp is already a major cross-platform messaging app with more than 500 million monthly users, and is well on-track to have 1 billion users. Oculus's virtual reality platform is still in the early stages, and as a result, there is limited visibility regarding its long-term success potential. 

Facebook can utilize its two other assets to generate revenues in the near-future. LiveRail has been an excellent acquisition because it will enable Facebook to ramp up its premium video ads business and make it a large driver of the company's total revenue pie. And Instagram can boost Facebook's mobile monetization efforts by allowing marketers to place visually appealing ads on its photo-sharing app.

Since, Facebook is banned in China, Instagram represents a great back door entry into China for Facebook. So the social media giant clearly has a number of invaluable properties in its arsenal that can drive significant revenue and earnings growth in the future. Some of these long-term growth catalysts like Instagram and WhatsApp have immense monetization potential.

Earnings expectations
Analyst expectations are high for Facebook's Q2. The consensus revenue estimates for Q2 stand at $2.81 billion and EPS is expected to $0.32 for the June quarter. In addition, analysts seem to be pretty upbeat about the company's prospects. Recently, UBS gave Facebook a $90 price target and a buy rating, and cited numerous long-term growth catalysts for the company including Instagram, Video Ads and WhatsApp. 

Investors and analysts alike seem to have a very favorable viewpoint about Facebook's growth potential. The company is trading near record-highs, but if the company can deliver top and bottom-line numbers that are well-ahead of the expectations of the consensus analyst estimates, Facebook's stock price should see newer all-time highs.