Facebook Inc: Is FB stock All Set For A Post-Earnings Rally?

Facebook Inc. (NASDAQ:FB) reports its Q2 2017 earnings this week. Will the earnings announcement lift FB stock to fresh all-time highs?

Menlo Park, California-based Facebook Inc.(NASDAQ:FB) is scheduled to announce its Q2 2017 earnings on July 26th, after the market close. Backed by a solid history of trumping analyst estimates, strong topline/earnings momentum, Facebook stock has been climbing higher as we head into the upcoming earnings report. FB stock has climbed steadily through the year, closing the last trading session at a price of $164.43 a share, very close to its all time highs around $165, which were also reached in the last week. Can Facebook continue to execute on its strategy and deliver yet another earnings surprise? Will the earnings announcement drive FB stock to fresh all-time highs?

Facebook Q2 2017 Earnings Analyst Estimates: No Sign Of Slowdown

The Wall Street consensus expects Facebook to report earnings of $1.12 a share on a topline of $9.2 billion. The current consensus implies a topline growth of 43% year-on-year and bottom line growth of 15.5% over the comparable year ago quarter. The 15.5% bottom line growth is a big drop from the 70%+ rate of earnings growth Facebook has reported in the last few quarters. However, there is a catch here. Starting with Q1 2017, Facebook has stopped reporting a Non-GAAP EPS number, which was usually higher than the GAAP EPS number, in the past. However, Wall Street analysts usually model for Non-GAAP numbers. With Facebook deciding to report only a GAAP number henceforth, it makes sense to compare the Q2 2017 estimates against the GAAP numbers from Q2 2016. The company had reported a GAAP EPS of 71 cents a share in Q2 2017. In other words, the $1.12 EPS consensus implies a growth of 58% over the comparable year ago quarter, which is in-line with Facebook’s recent earnings growth trajectory.

Facebook Earnings History And Q2 Earnings Whisper

Facebook has a stellar track record as far as beating earnings estimates is concerned. The company has beaten/met analyst estimates in 19 out of the 20 reported quarters since the company went public in 2012. Facebook has delivered an average earnings surprise of 7.8% over this period. Looking at the more recent earnings history, Facebook has crushed Wall Street consensus in the last 4 quarters. Not only has the company delivered an earnings surprise, but it has also met/beaten the high end of Wall Street estimates in each of the last 4 quarters. Given the recent earnings history, Facebook will likely report at/above the high end of Wall Street estimates, which at $1.21, and would represent a 9 cent beat.

The current earnings whisper number expects Facebook to report earnings of $1.22 a share, implying a 10-cent beat, which equates to a 9% earnings surprise. Facebook’s strong earnings history and the current whisper number imply that a Facebook will likely crush analyst estimates once again.

Investors Should Also Watch…

As we have repeatedly said in the past, Instagram and Messenger are clearly emerging as the new growth drivers for Facebook Inc. With concerns of peaking ad loads on the core Facebook platform, investors questioned the ability of Facebook to continue its solid growth. As we had covered in a recent post, we believe that Wall Street is underestimating the impact of Instagram on Facebook’s overall growth. Putting it another way, the emergence of Instagram as a multi-billion dollar play will help Facebook crush Wall Street estimates. In fact, Piper Jaffray analyst Sam Kemp believes that Instagram and Messenger could help Facebook triple its revenue in the next 5 years. Given the growing importance of these platforms to Facebook’s overall growth, any commentary around Instagram and Messenger monetization will be closely watched.

More recently, Facebook has also been attempting to monetize WhatsApp, its billion-users strong mobile communication app. The company recently got an in-principle approval to test an in-app payments service in India, which is probably one of the biggest markets for the messaging platform. Given the scale at which WhatsApp currently operates, a successful monetization strategy could really have a telling impact on Facebook’s overall performance. Investors should also keep an eye out on other monetization efforts on the core Facebook platform, like the decision to live stream soccer matches and the recent decision to develop a product which will allow news subscription from the core Facebook app. In addition, Facebook is also busy altering its VR strategy, having decided to come up with a low-cost VR headset, which, combined with its decision to make Oculus a standalone VR device, could go a long way in making VR a significant factor in Facebook’s overall growth. Hence, investors should keep a close eye on any further details on this front.

Conclusion

Facebook is scheduled to report its latest earnings report on the 26th of July after market close. Facebook has had an exciting quarter with Instagram growing into a multi-billion revenue engine while Messenger and WhatsApp have started testing out various monetization opportunities. In addition, Investors will also be closely watching any developments on the partnership with publishers, live streaming efforts and the decision to make Oculus a standalone product. All in all, given the recent developments, Facebook’s earnings history and the current earnings whisper, Facebook looks set for another earnings beat. A solid earnings beat combined with a better than expected guidance could send Facebook stock to fresh all-time highs. FB stock is one of our top stock picks from the technology sector, which have outperformed the NASDAQ by over 150%.

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