A month has gone by since the last earnings report for Facebook, Inc. (FB - Free Report) . Shares have added about 17% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is FB due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Facebook reported first-quarter 2018 earnings of $1.69 per share, which improved 63% from the year-ago quarter and crushed the Zacks Consensus Estimate of $1.36 per share.
Revenues of $11.97 billion handily beat the Zacks Consensus Estimate of $11.45 billion and surged 49% from the year-ago quarter. Excluding the impact of year-over-year changes in foreign exchange rates, revenues jumped 42.3%.
Facebook has been under fire from all quarters ever since data misuse allegations surfaced against the company in mid-March. However, this has not impacted Facebook’s performance so far. We note that mobile efforts continue to pay off big time for the social media giant, with mobile advertisements recording stupendous success.
The company’s shift in focus from “passive consumption to encouraging meaningful interaction” is also reaping benefits, with a decline in passive video consumption and increase in sharing.
Facebook has also updated its platform to prevent false news, hate speech and other abuses and is taking stringent steps to uphold data privacy. The company is investing in security systems and Artificial Intelligence (AI) technology to show more news from trusted sources. The company is also working on making ads more transparent ahead of important elections in many countries. The company expects to expand its security and content review team to more than 20k people by this year end.
Although investments on these update may affect profits in the near term, these initiatives are expected to help Facebook build a stronger community in the long haul.
Expanding Product Portfolio: A Key Catalyst
Facebook’s innovative product roadmap that includes Watch, Stories and Marketplace will continue to drive growth. The launch of Oculus Go this year is also encouraging.
The company believes that the introduction of Watch Party will help in improving meaningful interactions. Moreover, its focus on expanding “meaningful Groups on Facebook” will help it achieve its goal of helping 1 billion people.
To ensure smooth communication between businesses and consumers, the company launched Quick Replies on Messenger and made ads available on inbox for advertisers. Facebook stated that more than 2 billion messages are now sent between businesses and customers every month. Click-to-Messenger Ads also holds promise for advertisers as it helps them get into direct communication with consumers.
Stories continues to be a key growth driver, with WhatsApp Status recording highest number of views. The availability of carousel ads in Stories is also a positive.
Between WhatsApp and Messenger, people send nearly 100 billion messages every day. Video and voice calling of more than 3 billion minutes per day has made Facebook “the largest network for video calling.”
Facebook recently launched WhatsApp Business, an app designed to facilitate communication between small and medium businesses and customers, which has almost 3 million users.
Additionally, the company is also running tests of payments in messaging, which is anticipated to help increase efficiency for businesses.
Quarterly Numbers in Details
Monthly active users (MAUs) were up 13% year over year to a staggering 2.20 billion at the end of the quarter.
Daily Active Users (DAUs) were 1.45 billion, reflecting a 13% year-over-year increase. This can primarily be attributed to growth in markets like India, Indonesia and Vietnam. These markets represented 66% of the total MAUs in the fourth quarter. DAUs increased in the United States and Canada by 1.6% on a year-over-year basis and 0.5% when compared sequentially.
Slowdown in DAU growth in the Rest of World market owing to Internet shutdown in Ethipoia among other factors was an overhang.
Advertising revenues soared 50.1% year over year to $11.795 billion. Mobile ad revenues surged 60% year over year to $10.7 billion, contributing 91% to total ad revenues.
Facebook has over 6 million active advertisers and Instagram has 2 million. There are 80 million active SMBs on Facebook and 25 million on Instagram.
Ad impressions served increased 8%, while average price per ad increased 39% from the year-ago quarter. The growth was driven by feed ads on Facebook and Instagram. Average revenue per user was $5.53, up 30.7% year over year.
Payments and other fees declined 2.3% year over year to $171 million.
The company’s gross margin was 84%, down 200 basis points (bps) year over year, due to increase in investment on video content and the impact of change in accounting for Instant Articles product from net to gross.
Cost and expenses increased 38.5% to $6.52 billion driven by an increase in sales and marketing and rise in workforce. Facebook hired 2,600 people (highest in history) during the quarter. The company focuses primarily on strengthening its technical team apart from various other fields. The company’s sales and marketing expenses increased 50.9% year over year to nearly $1.6 billion, due to increase in investments on quality and safety initiatives.
However, robust revenue growth provided enough cushion to operating margins. Operating income of $5.45 billion grew 63.8% year over year. Operating margin expanded 410 basis points (bps) to 45.5% in the quarter.
Balance Sheet & Cash Flow
As of Mar 31, 2018, cash & cash equivalents and marketable securities were $43.96 billion compared with $41.71 billion as of Dec 31, 2017. The company generated $7.86 billion of cash flow from operating activities in first-quarter 2018 compared with $7.67 billion in fourth-quarter 2017. Free cash flow was $5.05 billion compared with $3.79 billion in the year-ago quarter.
Management believes that Facebook and Instagram are well positioned to grow in 2018, primarily on the back of increasing effectiveness of ads. For 2018, Facebook expects constant currency ad revenue growth rate to decelerate. Rollout of GDPR is likely to impact European MAU and DAU growth in the second quarter.
Facebook projects total expenses to increase between 50-60% in 2018 compared with the prior guidance of 45-60%. The increase in mid-point is attributed to rising investments in safety, security, content acquisition for Watch and long-term innovation efforts related to AI, augmented and virtual reality and connectivity.
Capital expenditure is expected to be around $15 billion compared with the prior range of $14-$15 billion, driven by increased investment in data centers, servers, office facilities and network infrastructure. Management expects tax rate in the mid-teens range for the second quarter as well as 2018.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. There have been 12 revisions higher for the current quarter compared to two lower.
At this time, FB has a strong Growth Score of A, though it is lagging a bit on the momentum front with a B. The stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Based on our scores, the stock is primarily suitable for growth investors while also being suitable for those looking for momentum and to a lesser degree value.
Estimates have been broadly trending upward for the stock and the magnitude of these revisions looks promising. Notably, FB has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.