Please ensure Javascript is enabled for purposes of website accessibility

Can Facebook Stock Keep Rising After Earnings?

By Andrés Cardenal - Apr 20, 2016 at 8:46AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Facebook stock is on fire. Will the coming earnings report provide more upside fuel, or will it be a cold-water bath for investors?

Facebook (FB 1.37%) stock is firing on all cylinders: Shares of the social network are up by more than 35% in the last 12 months. The company is producing impressive financial performance, but expectations are also quite demanding for Facebook at this stage. 

The social network is scheduled to report earnings on Wednesday, April 27, so investors will probably want to closely scrutinize the key numbers in order to tell if Facebook has more upside fuel, or if it's already time for a pullback in the stock.

Users are the lifeblood of the business
Sales and earnings are undeniably important, but users can be downright crucial. In order to sustain financial performance over time, Facebook needs a big and actively engaged user base producing plenty of opportunities for monetization.

The company ended the fourth quarter of 2015 with 1.59 billion monthly users, a 14% increase versus the same quarter in 2014. Facebook is doing particularly well in mobile devices, a key growth area in the industry, the platform has 1.44 billion monthly mobile users as of the end of 2015, a healthy increase of 21%.

Importantly, daily users are growing at a faster rate than monthly ones, showing user engagement is on the rise. Daily active users were at 1.04 billion as of December of 2015, a year-over-year increase of 17%. Mobile daily users grew by a staggering 25% last quarter, reaching 934 million in December of 2015.

Considering its gargantuan size, Facebook is doing remarkably well on the user front. As comparison, competitor Twitter (TWTR 3.17%) reported 305 million monthly active users as of the end of 2015 when excluding SMS Fast Followers. The figure represents a modest increase of only 6% versus the same quarter in the prior year, so Twitter is clearly underperforming Facebook in terms of both size and growth.

As Facebook continues gaining size over time, it's only natural to expect user growth to slow down. Once the low-hanging fruit has already been collected, Facebook needs to expand into more challenging regions and demographics to attract more users, and this can understandably put downward pressure on growth.

Turning users into dollars
It all starts with user growth and engagement, but it doesn't end there. If Facebook is going to continue producing market-beating returns, management needs to prove to investors that it can consistently translate user activity into revenue growth.

Total revenue during the fourth quarter of 2015 came in at $5.84 billion, a big 52% increase versus the fourth quarter of 2014. Mobile advertising revenue amounted to 80% of revenue in the period, up from 60% of revenue coming from mobile in the year-ago quarter. For the coming earnings release, Wall Street analysts are expecting the company to deliver $5.25 billion in total sales, which would represent an annual increase of 48.1%.

A key venue allowing Facebook to deliver extraordinary sales growth is increasing monetization levels. The company made $3.73 per user on a worldwide scale during the fourth quarter of 2015, which is a vigorous increase of 32% year over year. Interestingly, revenue per user in the U.S. and Canada is significantly higher than in the rest of the world, at $13.54. If management can bring monetization levels across the world to levels more in line with those of the U.S. and Canada, this could be a powerful driver for the company going forward.

Facebook is focusing on video content and advertising to drive revenue growth without hurting the user experience too much. According to CEO Mark Zuckerberg, more than 100 million hours of video are currently being watched on Facebook on a daily basis. In addition, the company is starting to monetize Instagram, which could open the door to promising opportunities going forward.

Facebook is venturing into virtual reality with Oculus, which the company purchased for $2 billion in 2014. While this business will probably have a modest financial impact in the short term, everyone will want to listen to what Mark Zuckerberg has to say about the future of virtual reality and how Facebook is planning to play its role in this exciting technology.

The company is aggressively investing for growth, and management expects the year-over-year growth rate in total expenses to be in the range of 30% to 40% in 2016. However, as long as Facebook is putting that money to good use and driving sustainable sales growth, increasing expenses should be no reason for concern.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$183.77 (1.37%) $2.49
Twitter, Inc. Stock Quote
Twitter, Inc.
$36.90 (3.17%) $1.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.