There are several reasons why 24 of the 29 industry analysts who follow Facebook (NASDAQ:FB) have the equivalent of a strong buy recommendation on the social media king. Coming off yet another stellar quarter, and with several growth drivers either in place or nearing introduction, the future looks awfully bright for CEO Mark Zuckerberg and team.
Of course, all the good tidings do not mean Facebook does not have a few hurdles to overcome. One noteworthy challenge reared its head in a big way last quarter, and based on management's conference call following its fourth-quarter and full-year 2014 earnings announcement, investors can expect more of the same. The concern? Skyrocketing expenses that will need to provide a return at some point to keep the lovefest from coming to a screeching halt.
There's plenty to like
To be sure, Facebook was firing on all cylinders last quarter, and in 2014. The 58% jump in annual sales, including a 49% year-over-year improvement in the fourth quarter, were impressive. Other key measurements, including Facebook's successful shift to mobile and user engagement efforts, are also clearly paying off.
Despite Facebook's size -- it boasts 1.39 billion monthly average users, or MAUs -- and familiarity, it continues to grow. Unlike its wannabe social media peer Twitter (NYSE:TWTR), its user engagement statistics are stunningly high. While Twitter, even with its meager 288 million MAUs as of last quarter (a paltry 4 million more than the end of the third quarter), has nearly twice as many visitors as actual users, Facebook "friends" are more engaged than ever before.
Of Facebook's 1.39 billion MAUs, a whopping 890 million log on to the site on a daily basis, and that number is growing. Clearly, concerns that Facebook would become "stale" from overuse haven't materialized. As for mobile, last quarter demonstrated that Zuckerberg's efforts are paying off in a big way..
On a monthly basis, 1.19 billion users -- slightly over 85% -- access Facebook via their mobile device. That compares to about 80% of Twitter's MAUs. And to think, just a little more than a year ago industry pundits were bemoaning the lack of Facebook's mobile engagement and ad solutions.
How much is too much?
Heading into last quarter's earnings news, Facebook CFO David Wehner forewarned investors that full-year spending would dramatically increase, to the tune of about 70% above the prior year. Last quarter's $2.7 billion in costs and expenses were a staggering 87% jump from 2013's fourth quarter. The result was that despite the huge jump in quarterly sales, Facebook collected an identical $1.13 billion in operating income and an only so-so 19% improvement in net earnings per share.
Per Facebook's quarterly conference call, investors can expect another significant jump in spending this year. According to Wehner, Facebook's overhead will increase another 55% to 70% in 2015. Where's all the money going? Much of last year's overhead was attributed to assimilating multibillion-dollar acquisitions including WhatsApp and Oculus.
Facebook COO Sheryl Sandberg also alluded to continued spending on infrastructure and internal data analysis tools, along with costs associated with testing video spots, among others. This explains why research and development costs nearly tripled to $1.1 billion last quarter alone.
Facebook's investment in video ads, which have finally made it out of the beta phase, is an ideal example of what prospective investors should monitor. There's certainly nothing wrong with spending -- it's necessary to spur long-term growth. The question is what kind of return will investors see -- from the new video spots, for example -- and when?
Facebook has a bevy of potential future revenue drivers in its hip pocket – WhatsApp, Oculus, and Instagram, to name but a few -- and spending is required to maximize each asset's potential. Now toss in continued acquisitions like the recent TheFind shopping search engine, new products, and costs associated with building out Facebook's ad tools, and Wehner's 55% to 70% projected increase in expenses in 2015 might again prove woefully low. Which is fine, assuming investors see results.