Facebook (NASDAQ:FB) is scheduled to report first-quarter earnings on Wednesday, April 22. The social network created by Mark Zuckerberg has been firing on all cylinders lately, with the stock rising by more than 40% in the last 12 months on the back of strong financial momentum and positive investor sentiment. Let's look at three important areas to monitor in the coming earnings release to see whether Facebook stock can continue rising after earnings or if it's time for a pullback.
Users and engagement
Sales and earnings are clearly crucial numbers, but it all starts with users and engagement. As long as Facebook continues growing its user base at a nice rate and keeping those users actively engaged, the company will have abundant opportunities to further boost monetization rates over time. To be a great business, Facebook needs to be first and foremost a strong social network.
In its earnings report for the fourth quarter of 2014 Facebook reported 1.39 billion monthly average users for December, an increase of 13% year over year. If it were a country, Facebook would be bigger than China. Still, user growth can be expected to slow, as most of the low-hanging fruit has been collected and the company needs to expand into tougher markets and demographics.
Facebook had 890 million daily active users as of the end of the last quarter, an 18% annual increase. The numbers of daily users are growing more rapidly than the monthly user count, so engagement is moving in the right direction. Also, Zuckerberg said in the company's last conference call that average time spent per person per day across the company's services -- excluding WhatsApp – increased 10% in the fourth quarter of last year.
Mobile is a crucial growth area in the industry, so it's important to watch how Facebook is performing on smartphones and tablets. Mobile monthly active usership grew by 26% to 1.19 billion in the last quarter, while mobile daily active users stood at 745 million, a 34% year-over-year increase .
Facebook is a growth company, and the stock is priced as such. For this reason, the company must sustain vibrant expansion rates for the stock to continue gaining steam.
Total sales during the last quarter came in at $3.85 billion, a 49% increase from $2.59 billion in the fourth quarter of 2013. Excluding the impact of foreign exchange rate fluctuations, revenue growth was 53%. The number came in above both Wall Street forecasts and the company's own guidance, so Facebook did remarkably well on the revenue front.
The company also booked $3.59 billion in sales from advertising, a 53% year-over-year increase. Mobile advertising is becoming increasingly more crucial to Facebook, as the segment accounted for 69% of advertising revenue during the fourth quarter of 2014.
Wall Street analysts on average forecast $3.57 billion in total revenue for the first quarter of 2015, which would represent a 43% annual increase from $2.5 billion in the first quarter of 2014.
The company has been actively betting on video and other innovative advertising venues, so investors might want to keep a close eye on how these formats are impacting both ad volume and prices.
Facebook is investing tons of money for growth, so management expects full-year 2015 total generally accepted accounting principles expenses to increase between 55% and 70% from 2014. This could easily put some pressure on profit margin, so it would not be a big surprise to see profits declining as a percentage of sales in the middle term.
Facebook is entering 2015 with 45% more employees than it had in 2014, and the company plans to continue investing in its talent base throughout the year. Facebook will also continue pouring money in different products, including both existing services and newer initiatives such as ad-tech, Internet.org, Oculus, and WhatsApp.
As long as the company continues delivering vibrant user trends and rapidly growing revenue, increasing expenses should be no cause for panic. It takes money to make money, and Facebook seems to be doing a sound job at consolidating its position in the industry and creating the conditions for sustained growth over the years ahead.
That being said, Wall Street on average expects $0.40 in earnings per share during the coming quarter, which would be a 67% increase from $0.24 per share during the quarter ended in March 2014.
Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. 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.