- Facebook Q3 2015 earnings are scheduled for release on November 4 after market hours.
- Facebook reported 13% growth in its MAU metric last quarter. If this is matched, it will be seen as solid growth and will surpass the 1.5 billion level of monthly users.
- Engagement levels came in at 65% last quarter. Solid growth in video should have increased engagement in Q3.
- Facebook is growing faster than YouTube in the online video ad arena. Its social network model should appeal more to advertisers over time due to better targeting strategies.
- Technically, the Nasdaq composite and Facebook look very strong with strong momentum behind them over the last few months. Shorting here would be very risky as any dips would probably be bought on strength.
After market close on the 4th of November, Facebook (NASDAQ:FB) announces earnings for Q3 2015 and analysts are expecting a non-GAAP EPS of $0.52 and revenues of $4.37 billion. If the tech company matches expectations, revenues and EPS growth would be 36% YoY and 21% YoY, respectively. Some investors and analysts recently have turned bearish on this stock due to its perceived high valuation (P/E ratio currently is at 105.89 with share price at $103.8 a share) but I would exercise extreme caution in shorting this stock at these levels despite the perceived overvaluation the stock may currently have. Just because the stock price is up 33% already this year (see chart) does not mean there can't be more to come from this tech giant.
Because there is so much growth already priced into this stock (and probably rightfully so), investors will be looking for more growth areas where the company can increase profits going forward. There is no doubt this company will grow meaningfully from here. The question is whether or not it can keep up its impressive growth rates across all current metrics (revenues, net income, user numbers, engagement, etc) whilst also carving out new areas where it can grow the business meaningfully. Its all about growth across all areas and we have already seen what happens to other tech companies (like Twitter (NYSE:TWTR)) when they falter on growth. Whether Facebook beats or disappoints on earnings, I believe the stock will continue to stay elevated which will please existing shareholders.
Firstly, we have to discuss "user growth" or "MAU" - monthly active users which will be one of the primary metrics investors will be watching in the earnings announcement. If the company matches its 13% year on year growth rate it achieved in Q2 2015, it will report current MAU to be more than 1.52 billion. This figure now is approaching 22% of the world's population, and hence how "engaged" these users are on the platform is a much better barometer as to where Facebook can go from here. The company calculates engagement by using the daily active users (DAU) metric against the MAU's. The engagement metric (DAU/MAU) was flat in Q2 2015 at 65%, which meant that the company couldn't convert enough monthly users into daily users through the quarter. If Facebook can announce strong user growth (anything around 13% would be fine) coupled with better engagement levels, then this stock should definitely rally past $109 a share (assuming we are at $102 a share before earnings) as the expected move is approximately 7% in either direction.
Speaking of engagement levels, Facebook has the possibility to increase them substantially through the online video market which is expected to go from $13.8 billion in 2015 to $19 billion by 2017. The surge in growth is mainly due to mobile consumption because data plans are faster, screens are bigger and in general mobile technology is improving year on year. Although YouTube is the undoubted leader in this area, Facebook has higher growth potential because of where it is coming from (still a low base compared to YouTube) and its superior ad targeting capabilities. Facebook's video views are rising at an extremely fast rate which will definitely bring in more advertisers over time. Why is this important? Well revenues will increase when advertisers see the ad targeting advantages that social media sites like Facebook bring. By operating everything basically under one website (compared to Google's many websites), Facebook is able to collect more information which is crucial for advertisers going forward. Facebook will do very well in this area over the next few years due to the underlying growth trend in online video and taking market share from other video sharing websites - predominately Google. There is ample runway for growth here as we have also seen new initiatives which go after TV advertisers through its Instagram platform. Watch the advertiser number. Initial indicators suggest it will be very strong.
On a technical level, Facebook has strong momentum behind it as it is up almost 20% since the end of August. The Nasdaq Composite (INDEX:COMPX) has also rallied strongly over the last 2 months and has now recovered to its 200 day moving average (see chart)
Moreover, the moving averages have crossed and the RSI levels are still not oversold which illustrates bullishness. Investors need to be mindful that the equity markets in the US have been propped up since 2009 and there is no way the powers to be are going to let them fall. QE4 has not been announced but it could easily be going on in the background unknowingly, which will keep stocks elevated. The "trend is your friend" definitely applies here considering the run this stock has had over the last 2 months.
To sum up, I expect Facebook to at least match expectations if not report a beat when it announces Q3 earnings. It has too much momentum behind it and has multiple areas where it can improve engagement levels. A bearish earnings strategy here would be dangerous in my opinion.