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Bull of the Day: Facebook (FB)

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Social media behemoth Facebook, Inc. (FB - Free Report) has been a “must-own” internet stock for years now, primarily because of the company’s remarkable ability to expand its core business. Facebook continued that trend with its latest quarterly earnings report. Now, despite spending concerns, Facebook has set itself up for a strong 2018—and beyond.

Facebook operates its titular social networking website, as well as the popular image sharing platform Instagram and messaging application WhatsApp. The company’s networks are incredibly popular on the web and on mobile platforms, including iOS and Android. Facebook reaches more than two billion monthly active users (MAUs) around the world.

On Wednesday afternoon, the Mark Zuckerberg-led company once again reported better-than-expected quarterly results on both the top and bottom line. Facebook also witnessed strong growth in key geographic regions and reminded investors that it is well prepared for the future of the technology sector.

Latest Earnings Results

Facebook reported adjusted earnings of $2.21, beating the Zacks Consensus Estimate of $1.96 per share. The company notched total revenues of $12.97 billion, surpassing our consensus estimate of $12.58 billion. These results marked year-over-year growth of 77.4% and 47.3%, respectively.

Changes to the U.S. tax code impacted earnings by $0.77 per share. Factoring in these costs, Facebook reported earnings of $1.44 per share—still about 20% higher than the year-ago quarter. Daily active users reached an average of 1.40 billion in December. Monthly active users were 2.13 billion at the end of the quarter, an increase of 14% year-over-year.

Facebook also continued its shift to a primarily mobile focus. Mobile advertising revenue accounted for about 89% of total advertising revenue in the quarter, up from approximately 84% in the year-ago period.

The company also said that its cash, cash equivalents, and marketable securities totaled $41.71 billion at the end of the quarter.

“2017 was a strong year for Facebook, but it was also a hard one,” said Zuckerberg. “In 2018, we're focused on making sure Facebook isn't just fun to use, but also good for people's well-being and for society.”

Zuckerberg is starting to touch on a topic here that many investors are concerned about: the company’s pledge to spend more money on security and content vetting. The earnings report also showed that Facebook increased its headcount by 47% in 2017, indicating that the company had already hired many new employees to help with this goal.

Increased spending is something that investors will always worry about, but Facebook’s changes should help improve its user experience down the line. For example, a recent change to the News Feed has led to reduced time spent on the platform by roughly 50 million hours every day.

But the News Feed change has also reduced the amount of clutter and meaningless viral content that a user sees. This means that users can more easily engage with content that they like—things that they are more likely to click on or share.

We also know that Facebook has invested heavily in video content. This has helped lift revenues, as advertisers typically consider video ads to be more valuable than traditional banner ads.

Another key catalyst to Facebook’s growth is its expansion in key markets. Facebook topped our revenue projections for the Asia-Pacific region, totaling $2.059 billion. This result was 52.6% higher than the year-ago period and ahead of our consensus estimate of $2.040 billion.

Facebook also witnessed its monthly user base surge by 23% in Asia. This region is now Facebook’s largest geographic area based on total number of users.

Going forward, Asia should continue to be a catalyst for Facebook. The platform has only just scraped the service of its potential audience in the region, and several population-rich countries are still expanding their access to the internet.

Key Chart

Facebook, Inc. Price, Consensus and EPS Surprise

Facebook, Inc. Price, Consensus and EPS Surprise | Facebook, Inc. Quote

As we can see, Facebook’s positive earnings surprise streak now extends to the past 10 quarters. But the key here is that, regardless of what happens in the first few days, Facebook shares almost always move higher in the month or so following a report.

Facebook has already started its post-earnings momentum, but the stock could just be getting started.

Want more analysis from this author? Make sure to follow @Ryan_McQueeneyon Twitter!

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