Tuesday, April 21, 2015

Expectations Are High for FB Stock; Will Earnings Deliver?

Despite increased spending, FB stock is a solid investment

Analysts are expecting strong numbers from Facebook Inc (NASDAQ:FB) when the mammoth social media company reports first-quarter earnings after the market closes Wednesday.

And those expectations appear to be supported by a number of factors that indicate a strong quarter for FB stock.

Analysts are expecting earnings of 40 cents per share for FB stock, an increase of 17.6% from 34 cents earned a year ago. Revenue is expected to be $3.6 billion, an increase of 42.4% from $2.5 billion a year ago.

The FB stock price has an average target of $91.70 per share, which equates to a gain of 10.9% from the current price of $82.70.

During its Q4 2014 earnings report, FB did not issue guidance for the first quarter of this year, but rather provided a general outlook for the entire year, forecasting a 5% drop in revenue for the year to $11.8 billion.

GAAP and non-GAAP expenses were projected to be much higher this year, with respective increases of 55%-70% and 50%-65%. Those capital expenditures are expected to stem from continued investments in FB networks, data centers and servers to handle increased video traffic on the Facebook site, as well as additional activity involving Internet.org.

Earlier this year, FB launched a traditional advertising campaign in the U.K. that included the use of commercials on the country’s popular television channels, as well as roadside billboards, newspaper print ads, and in-theater displays. So far, Facebook has spent nearly $9 million on the campaign, but it’s unclear at this time what percentage of the company’s total ad spend will be earmarked for this purpose.

FB stock remains a solid investment, and the company’s increased spending to improve ad tech for Instagram, Messenger and WhatsApp only serve to demonstrate management’s focus on attracting and retaining long-term marketers. Considering last week’s announcement by Jan Koum, CEO of WhatsApp, that the service now has more than 800 million monthly active users, FB is poised to rake in potentially significant ad revenue as the free chat app continues to grow in popularity.

Most notably, the number of teenagers still using facebook on a regular basis has apparently not declined as quickly as analysts had predicted a year ago. A recent study conducted by Pew Research stated that 71% of the 1,000 participants aged 13-17 said they used Facebook, and 41% said they used it more often than competing social media services.

The continued use by teens, paired with advanced measurement and tracking tools in the Atlas ad server, should allow management to secure better arrangements with advertisers and marketers for the long term.

Expect this week’s Facebook earnings report to meet Wall Street estimates for revenue and EPS. Capital expenditures will likely be much higher than last year due to the company’s increased investment in improving ad tech as well as the initiation of a traditional media campaign in the U.K.

Article originally appeared on InvestorPlace (04/21/2015)