Facebook Q3 2014 Earnings Review

  • Facebook reported Q3 2014 earnings of 43 cents, beating analyst estimates by 3 cents.
  • The reported revenue of $3.2 billion was 3% higher than analyst consensus estimates.
  • The strong results failed to impress investors, as the stock was sold off in after-hours trade on concerns of lower guidance for Q4 2014.
Facebook Q3 2014 earnings review

Facebook (NASDAQ:FB) reported its Q3 2014 earnings results yesterday after market close (Oct 28). The company beat analyst estimates on both the topline as well as bottomline, as we had stated in our preview. However, a marginally lower guidance for Q4 2014 forced a sell-off in after-hours trade following the conference call. The stock lost over 8% in after-hours trade. The sell-off could present an opportunity for long term growth investors, given the huge growth in topline and earnings Facebook is currently experiencing.

Facebook Earnings Q3 2014

Facebook reported a solid growth in topline as well as bottomline. Facebook’s Q3 2014 results are summarized in the table below.

In millions of $, except per share numbers

Q3 2013

Q3 2014

YoY change/growth

Revenue

2016

3203

58.9%

Operating Income
GAAP

736

1397

89.8%

Non-GAAP

987

1820

84.4%

Operating margin
GAAP

36.5%

43.6%

7.1%

Non-GAAP

49.0%

56.8%

7.9%

Net Income
GAAP

425

806

89.6%

Non-GAAP

666

1149

72.5%

Net Income margin
GAAP

21.1%

25.2%

4.1%

Non-GAAP

33.0%

35.9%

2.8%

Earnings per share (EPS)
GAAP

0.17

0.30

81.7%

Non-GAAP

0.27

0.43

61.0%

Source: Facebook

Facebook reported yet another quarter of continued growth across all metrics. Facebook reported revenue growth of 59%, compared to 60% YoY growth in Q3 2013. The revenue growth came in lower than Q1 and Q2 2014, which is in line with the management’s earlier commentary. Q3 2014 once again saw earnings growth coming in higher than revenue growth, with 82% growth in GAAP EPS and 61% growth in the non-GAAP EPS. The higher earnings growth was a result of better cost controls through the quarter, which saw profit margins expand at the operating as well as net levels. The operating margin saw an expansion of 7.1% over Q3 2013 while the net income margin came in 4.1% higher than Q3 2013.

Facebook Revenue From Mobile Improves

Facebook measures engagement using the DAU (daily Active users) to MAU (Monthly Active Users) ratio. The Q3 2014 DAU/MAU ratio came in at 64% which was a significant improvement from 61% in Q3 2013. The ratio has consistently improved over the last few quarters, highlighting the stickiness of Facebook’s product.

Facebook DAU to MAU ratio

Facebook’s mobile monetization continue to improve, reflected in mobile generating 66%of Facebook’s ad revenue in Q3 2014, compared to 49% in Q3 2013 and 62% in Q2 2014. Focus on mobile monetization will continue to be important to drive long term success at Facebook as users are increasingly accessing the platform from mobile devices. This is reflected in the faster growth in mobile MAU’s as compared to overall MAU’s.

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

MAU growth

23.0%

21.1%

18.1%

16.0%

16.4%

14.8%

13.4%

Mobile MAU growth

53.9%

51.1%

44.9%

39.0%

34.5%

30.6%

28.1%

Analyst estimates v/s Facebook actual performance

Analyst consensus

Actual

Revenue beat/Earnings surprise

Revenue (in millions of $)

3115

3203

3%

Non-GAAP EPS ($)

0.4

0.43

8%

Facebook beat the consensus analyst estimate on both the topline as well as bottomline, reporting revenue beat of 3% and an earnings surprise of 8%. This was the 6th consecutive quarter of earnings and revenue beat from the social networking giant.

Facebook Future Outlook

The management stated in the conference call, its intent to increase reinvestment into the business which could depress profit margins in the coming quarters. Moreover, the coming quarter will see the closing of Whatsapp acquisition, which will lead to a significant increase in the number of Facebook’s outstanding shares and also the stock compensation for Q4 2014. Due to the huge expected rise in stock based compensation and amortization of intangibles, the profit margins in Q4 2014 could take a hit. However, the management’s decision to invest in the firm will lead to long term benefits in the form of sustained growth in earnings and revenue.

In conclusion, Facebook profitability could take a short term hit, delivering a direct blow to the earnings over the coming quarters. However, the huge operating scale, increasing stickiness of the product and improving monetization on mobile could help to drive long term growth at Facebook. Facebook valuations, PE ratio of 70 and price to sales ratio of 17.6, Facebook continues to trade at levels outside the realms of value investing. However, the huge growth potential, large user base and brilliant cost controls merit a deeper look from a growth investor. Our Facebook stock analysis highlights the strong operational fundamentals of Facebook, while highlighting the valuation concerns surrounding the stock.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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