It's been a tough start for most stocks in 2016, and Facebook (NASDAQ: FB) has been no exception. The stock is down 10% year to date compared to the S&P 500's decline of about 8.5% during this same period, but this doesn't mean investors don't have big expectations. This premium valuation is a testament to the market's confidence in the company's long-term potential.
These expectations will be put to the test next week when it posts fourth-quarter results. Can Facebook continue to impress?
Here are three metrics to watch:
Growth is crucial to Facebook stock's potential. The stock's valuation, which sports price-to-earnings and price-to-sales ratios of 95 and 16.8, respectively, has considerable growth baked in. Indeed, the company's surprising growth since its initial public offering in 2012 has been one of the key drivers behind the stock's performance to date.
So, what sort of revenue growth can investors expect from Facebook during Q4? Based on its recent growth, it's likely to grow revenue in the range of 37% to 41% compared to the year-ago quarter.
During Q3, Facebook's revenue increased 41%, year over year. While this was an acceleration from the 39% year-over-year revenue growth it reported for Q2, investors shouldn't expect further acceleration in year-over-year revenue growth. Facebook's high level of growth simply isn't sustainable over the long haul, and it's bound to decelerate over time. Of course, further acceleration is possible, but would only be icing on the cake.
Daily active users
One of the most important metrics in gauging the health of Facebook's underlying social network is daily active users, or the number of users who use it every day. Not only does it represent its most important users, but it is also what makes Facebook so valuable. No other social platform comes even close to its impressive 1.01 billion daily active user count.
Look for its daily active users to increase at least 3% sequentially. Looking back to sequential growth in daily active users during the first three quarters of the year as a barometer of the company's recent user growth, sequential growth rates for these quarters averaged about 4%.
Increasing use of Facebook on mobile devices has played a key role in driving engagement on the company's social network higher. But with mobile adoption rates slowing in Facebook's biggest markets, engagement, measured by daily active users as a percentage of monthly active users, appears to be leveling off. Its engagement rate has hovered at 65% during the previous three quarters.
Investors shouldn't expect an increase in its engagement rate to increase next week. But look to see if the metric takes an unusual hit. If the metric does take a hit, look for an explanation during the company's earnings call.
While these three metrics are worth checking in on, out-of-the-ordinary fluctuations in any of them shouldn't spark rash investment decisions. For a company that is growing as fast as Facebook, there is bound to be a lot of volatility across its business. But if there are any surprises, investors may want to look over the quarter's financial statements and listen to the earnings call discussing the results more closely.
Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends 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.
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