Facebook Earnings Preview: Top-Line Growth May Slow Down, But Long-Term Outlook Is Strong
Investors will be keenly following Facebook (NASDAQ:FB) on Wednesday, January 28, when the company reports its fourth quarter results for 2014. The company’s top-line growth is expected to slow-down in Q4 due to tougher year-over-year comparisons; in addition, its GAAP margins are expected to come in lower due to a rise in stock-based compensation expenses. We expect fourth quarter earnings to be driven by rise in mobile monetization, improvement in ad products, and growth in the number of marketers on the platform.
Facebook’s management had earlier estimated expenses (in non-GAAP terms) to rise by 50% to 70% during 2015, and we’d be looking for more details around these investments during the earnings call. While this acceleration in spending may look disappointing on the face of it, we’d like to remind investors that Facebook is still sowing seeds when it comes to tapping opportunities in several businesses and platforms, and this could reap huge profits for the company over the next 5-10 years.
Facebook hasn’t even begun scratching the surface of its potential on platforms, including WhatsApp, Instagram, Messenger, Search, etc. While Facebook’s revenue growth may seem to be decelerating, we believe there is ample opportunity for the company to propel growth anew, through drivers such as introduction of newer ad products (video-based advertising), more-targeted advertising, international expansion, and monetization on other platforms. Hence, we have forecast the company’s top-line outlook to remain strong over the remainder of our forecast period.
See our complete analysis for Facebook
Increased Expenses Could Cause Concern
During the third quarter earnings call, FB’s management had upped the forecast for annual growth in total-GAAP expenses for full year 2014 from the prior estimate of 30-35% to 45-50%, due to the impact of WhatsApp acquisition on stock-based compensation expense. Further, management had outlined 2015 to be an investment year for the company, because of which they forecasted overall expenses (on a GAAP basis) to rise by 55% to 75% for the year. In terms of non-GAAP, total costs are estimated to surge by around 50% to 70% during the year. We will be looking for more color on FB’s investment strategy during the earnings call, to assess how these investments could fast-track top-line growth in the coming future.
In addition, the management had guided annual revenue growth to be in the range of 40% to 47% during the fourth quarter, which represents a slow-down against 60% levels seen during the prior two quarters. All in all, this means that we could see some sequential margin erosion in FB’s business during the fourth quarter.
Ad Revenue Growth Will Remain Robust But Will Likely Be Impacted By Tougher Year-Over-Year Comparisons
Facebook’s ad revenue growth surged significantly by 70% during the nine months ended September 2014. This was mainly fueled by 150% growth in average ad pricing, as the number of ads delivered declined by 32% during this period. These price/volume dynamics were the result of the continued shift from desktop to mobile and a higher proportion of feed-based ads (which are fewer but are more prominent). During the fourth quarter, we expect Facebook’s monetization to continue to grow at a strong pace; however, as Facebook had rolled out news-feed ads on a large-scale during Q4 2013, this will make the year-over-year comparisons more difficult during the last quarter of 2014.
The rapid rise in mobile monetization is another factor that will drive Facebook’s earnings. Mobile ad revenues increased by 114% during Q3 and comprised 66% of the total advertising revenue. Moreover, mobile daily active users (DAUs) stood at 703 million in September, accounting for more than 80% of the total DAU base. We expect monetization on the core platform to increase steadily over our forecast horizon, fueled by better and more targeted advertising, an increase in the number of marketers, growth in international average revenue per user (ARPU), introduction of newer ad products, and advancements on the mobile platform.
We will also watch out for information pertaining to international revenues and video-based advertising in the earnings report, as these could be a source of long-term growth for Facebook. We think the company is still under-penetrated in terms of its monetization opportunity in various regions such as Asia, Africa and South America. During Q3 2014, Facebook’s ARPU figure for Europe, Asia and rest of the world geography stood at $2.87, $1.18 and $0.85 respectively, as compared to US and Canada’s figure of $7.39. Hence, we think these developing markets could drive FB’s earnings over the long term, once the U.S. market starts moving towards saturation. Video-based advertising is another trend that is expected to bolster FB’s earnings in the coming quarters — more than 1 billion video views per day are being delivered on FB’s core platform presently, and initial tests around video advertising have proved to be successful. Hence, it will be interesting to know more about Facebook’s plans on this strategy during the earnings call.
Immense Potential In Non-Core Platforms
Another area which would interest investors during the earnings call is how Facebook proposes to step up its monetization from non-core platforms, including Instagram, WhatsApp, Search and Messenger in the coming future. We believe these other platforms have tremendous potential to accelerate FB’s business in the coming years —WhatsApp and Instagram have now passed 700 million and 300 million active users mark respectively, and investors would want FB to start monetizing these opportunities sooner rather than later. [1] [2] Additionally, Facebook’s Messenger app’s users have also increased drastically from 200 million in April 2014 to over 500 million in November 2014. [3]
We will revisit our $64 price estimate for Facebook’ stock, post the earnings announcement.
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Notes:
- WhatsApp Keeps on Growing, Hits 700 Million Users, Re/Code, January 6, 2015 [↩]
- Instagram Passes 300 Million Users, Forbes, December 10, 2014 [↩]
- Facebook new Messenger service reaches 500 million users, BBC, November 11, 2014 [↩]