- Facebook reported solid topline growth in Q1 2014 earnings, driven largely by traction in mobile advertising revenues.
- The profit margin saw an expansion on account of better leverage in cost of revenues.
- The combination of solid topline growth and margin expansions canvassed with the long term potential of video ads and Instagram monetization will drive earnings growth at Facebook over the long term.
Facebook (NASDAQ:FB), the largest social networking giant, reported its Q1 2014 earnings performance after market close yesterday (April 23). The company reported solid topline growth fueled by significant growth in mobile advertising revenues. Having solved the mobile puzzle, Zuckerberg and co came out firing on all cylinders, for yet another quarter. In our Facebook earnings review we take a deeper look into the performance of Facebook, its valuation levels and also our outlook on the FB stock post Q1 earnings.
Facebook Q1 2014: Traction in mobile continues to drive topline
Facebook reported solid growth in revenue with Q1 2014 revenue of $2.5 billion up 72% over the year ago quarter. The revenue saw a sequential decline of 3%, which isn’t a concern given the fact that Q4 is typically the strongest quarter in the online advertising business. The strong topline growth was driven by yet another strong quarter of mobile advertising revenue growth. The strength of mobile growth can be gauged from the fact that mobile revenue contributed 59% to the total advertising revenue, up from 30% in Q1 2013. The overall advertising revenue saw a YoY growth of 82%, further highlighting the traction in the mobile segment. The table below shows the break-up of Facebook’s advertising revenue.
|Q4 2012||Q1 2013||Q2 2013||Q3 2013||Q4 2013||Q1 2014|
|PC Ad Revenue (in %)||77||70||59||51||47||41|
|Mobile Ad Revenue (in %)||23||30||41||49||53||59|
The solid topline growth was further complemented by a margin expansion on account of better leverage in operating costs. The operating costs for the quarter came in at 57% of total revenue, a significant improvement from the 74% in Q1 2013. The major driver of cost control was cost of revenue, which accounted for 18.5% of revenue compared to 28% in Q1 2013. The net result of cost control was an operating margin expansion by 17.4% points, with operating margin for Q1 2014 coming in at 43%. The Net Income margin expanded 10.6%, with a Q1 2014 margin of 25.7%.
The stellar topline growth combined with improving profit margins led to a significant jump in earnings. Facebook reported an earnings per share 24 cents, which was a 180% improvement over the 9 cents in Q1 2013. The table below summarizes the solid quarterly performance of Facebook, as compared to Q1 2013.
|Q1 2013||Q1 2014||YoY Change|
|Operating Margin (in %)||25.6||43.0||17.4%|
|Net Margin (in %)||14.9||26.0||10.6%|
Actuals v/s Estimates
Facebook trumped analyst estimates on both the topline as well as bottom line. The revenue beat and earnings surprise given in the table below further accentuates the strength of Facebook’s stellar quarter.
|Consensus Estimate||Actual||Beat %|
|Revenue (in millions)||2,340||2,502||6.9%|
|Non GAAP Earnings (in cents)||0.24||0.34||41.7%|
Source of consensus estimate: streetinsider.com
The huge earnings surprise is a direct function of the solid topline growth and margin expansions on account of better leverage in operating costs. It is interesting to look into the current valuation multiples of Facebook in the face of improving fundamentals.
Facebook Current Valuation
|Current Price (Apr 23 closing)||61.36|
|LTM PE ratio||82.92|
|LTM PS ratio||17.52|
Facebook continues to trade at exorbitantly high multiples, which are beyond the realm of value investing. However the improving fundamentals, mobile success in the coming quarters and levers like video ads and Instagram monetization in the long term, present a significant opportunity for earnings growth at Facebook. We, at Amigobulls continue to remain bullish on the Facebook business but remain apprehensive of Facebook as a stock, which is reflected in our Facebook stock analysis, as it continues to trade in line with other momentum stocks like Twitter and Amazon. Also reports of click fraud, represent another degree of risk to the advertisers’ trust on Facebook which is critical for the long term growth at Facebook. Keep reading for the latest updates from the technology stock world as we head deeper into the Q1 2014 earnings season. Happy Investing!!
To see Facebook’s latest stock price movement, click here (NASDAQ:FB)