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FB Stock: Facebook Inc (FB) Stock Is A Buy Ahead Of Q4 Earnings

Menlo Park, California-based Facebook Inc (NASDAQ:FB) is scheduled to report its Q4 2016 earnings after the bell on Feb 1. Wall Street consensus expects the company to report EPS of $1.31 on revenue of $8.5B, implying 65% YoY earnings growth and 45.6% YoY growth in revenues.
FB stock is off to a strong start in 2017 with the Facebook stock price gaining nearly 15% in the year-to-date. The stock last traded at a price of $132.18, closing in on its all-time high of $133.28, set in October 2016. Should you buy FB stock near its all-time highs? Will the upcoming earnings report add fuel to the current rally in FB stock price?
Facebook Inc (NASDAQ:FB), Facebook application login page, Apple iPad Air, tablet, logo

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Wall Street Is Bullish Ahead Of Facebook Q4 Earnings

Facebook stock has been dragged by concerns of revenue/earnings slowdown, driven by management’s recent commentary. Facebook CFO David Wehner had stated, on the Q3 2016 earnings call, that ad load growth would slow “meaningfully”, which could impact Q4 revenue growth. The Facebook CFO also mentioned that 2017 will be a year of heightened investment activity at the social networking giant, which could lead to a contraction in Facebook’s profit margins. This will mean slower earnings growth, to go along with the slower top line growth.

Given that the FB stock trades at a PE of 51 (as of Jan 27th close price), revenue/earnings slowdown is the last thing investors would let go unpunished. As a result of the cautious commentary from the management, the Facebook stock price tanked following the last earnings call, going from $127 to $115 within 2 weeks. However, the negative concerns were overblown, as we had highlighted in earlier posts. As a result, Facebook entered 2017 on significantly lower expectations, a fact which remains unchanged going into the earnings call. Recent Wall Street commentary converges with this theory as well.

In a recent bullish note, Pacific Crest Analyst Andy Hargreaves, who has rated FB stock at “Overweight” (1) with a $150 price target, noted that “opportunities for Facebook to raise ad pricing and grow monetization” are “more than counterbalance risk of declining ad load growth.” More recently, analysts at Keybanc echoed a similar bullish outlook on the Facebook stock. As per, KeyBanc believes that Facebook’s “growth outlook remains solid” while concerns regarding expenses have been overblown. The firm, with an “overweight” rating and $150 PT for FB stock, believes that Facebook will topple Q4 consensus estimates.

Operating Metrics Point To Facebook’s Continued Strong Performance

The latest Facebook benchmark report from Nanigans supports the thesis of “concerns being overdone” with respect to Facebook’s growth. Facebook’s core metrics, like Click Through Rates (CTR), Cost Per Click (CPC) and Cost Per Mille (CPM) are important indicators of the overall performance of Facebook as an ad-platform.

The Facebook advertising benchmark report from Nanigans, an ad technology firm offering solutions to advertisers, offers a peek into these core metrics. We have highlighted the key takeaways from the latest Nanigans report below.

– Return on Ad spend grew by 33% YoY while e-commerce mobile spend registered a 23% YoY growth.

– Global CTRs rose 42% YoY, coming in at 1.59% for the quarter.

– Global CPMs rose 10% YoY to $7.01 while CPCs declined 23% YoY to $0.44.

The slowdown in CPC growth was attributed to an increase in ad spend going to the Facebook audience network, which generated lower ad rates compared to native Facebook ads and also the continued shift to mobile versus PC. However, the declines in the CPC will be more than offset by the growth in impressions, which have been growing at 40%+ rates over the last few quarters. All in all, Facebook’s operating metrics indicate a strong performance through the holiday quarter, which should also reflect in Facebook’s Q4 earnings report.

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