The Q3 earnings report released yesterday (Wednesday) gives us some clues...
FB stock surged 14% in after-hours trading Wednesday, after the social media giant announced a third-quarter profit of $425 million, or $0.17 a share.
Unfortunately for shareholders, the rally didn't last long, as FB shares dipped back into the negative shortly after 6 p.m.
Earlier in the afternoon, Facebook reported that earnings per share stood at $0.25, beating analysts' estimates of $0.19 for the quarter. This time last year, Facebook earnings were reported at $0.12 a share, and the company suffered a profit loss of $59 million, or $0.02 a share.
Mobile advertising accounted for 49% of the company's advertising revenue, a total of approximately $881 million.
There are now more than 1.19 monthly active Facebook users, representing an 18% increase in the past year. Approximately 507 million active monthly users access their accounts from a mobile device. For every mobile app downloaded, Facebook officials continue to see dollar signs.
"They're doing what they're supposed to be doing: Beating numbers and setting expectations low," Wedbush analyst Michael Pachter told MarketWatch. "Revenue was great, opex far lower than they guided to, so that pretty much explains the earnings-per-share upside.
"The real takeaway is that they are starting to show leverage, so they should see earnings accelerate on more modest revenue growth going forward."
The mobile advertising news pushed the social media stock up 14% shortly after 4 p.m. Wednesday, but those gains reversed after the earnings call.
That's when Chief Financial Officer David Ebersman told investors and analysts the number of daily-active young teens decreased this quarter. So for every mom who joins the social media site, her preteen daughter appears more hesitant to log on.
He does maintain, however, that youth engagement is "stable."
Additionally, Ebersman noted that in upcoming quarters Facebook will not increase the number of ads that its users see when using their mobile platforms. That announcement was surely welcomed by advertisement-averse users - and snubbed by shareholders pleased with the revenue increase.
After Ebersman's call, FB stock dropped back down to $47.40 by 6 p.m. Facebook opened today at $50.00.
Investing in Facebook Stock Now
For many, the first thing that comes to mind when thinking of Facebook's stock is the social-media giant's anemic IPO from May 2012. But in the last 12 months, FB stock has gained an impressive 140%.
Money Morning discussed Facebook's growth late last month and pointed out that advertising, specifically mobile, was the key to Facebook's resurgence.
"Facebook has integrated in-stream ads to the user experience," Money Morning E-commerce Director Bret Holmes said in September. "Response rates are high and advertisers will always chase the least expensive ad with the best response. It works because it's new and cheap.
"Facebook now has the most advantageously competitive product on the market for advertisers - hands down," said Holmes.
The news that the number of mobile advertisements will not continue to increase helps explain last night's dip for Facebook stock. Because mobile advertising has played such a crucial role in the company's revenue and recent stock surge, investors were initially worried that a stabilization in the number of mobile ads will also weaken Facebook's earning potential.
While FB stock may have room to grow in the short-term, Money Morning Chief Investment Strategist Keith Fitz-Gerald warns this is not a stock for those who prefer "buy-and-hold" investments.
Fitz-Gerald believes eventually social media users find the next best platform.
"Personally, I prefer businesses that have broader moats, more predictable cash flows, and customers who actually need their products," Fitz-Gerald said. "Facebook remains nothing more than a discretionary collection of individuals who use it... for the moment. The next best thing is quite literally a click away."
Fitz-Gerald provides a troubling chart in his recent piece that helps illustrate future hurdles for Facebook and its stock.
Check it out here...
- Market Watch:
Facebook Beats Targets but Spooks Investors
Facebook Earnings Blow Past Expectations
- The Street:
Facebook Loses Gains as Teens Flee
- Business Day:
Facebook Shares on Roller Coaster as Comments Undermine Results
- Tech Crunch:
Facebook's Mobile Tipping Point: 48% of Users Are Now Mobile Only