Facebook (FB) Stock: A Buy Before Earnings?

Facebook (NASDAQ:FB) stock gained roughly 0.40% in Friday trades despite a downgrade to ‘Neutral’ from ‘Buy’ by BTIG Research. In a research note to investor, the firm said that while the social media giant is “one of the only ways” to invest in the shift from legacy media ad dollars to mobile ad revenue, its ad growth rate remains extremely high. Friday’s downgrade also said that investor expectations over the past year have risen dramatically prompting the firm to feel that the bar is “simply too high.”

Facebook is scheduled to report 2Q16 earnings Wednesday. The Street is looking for EPS of $0.81 and revenue of $6 billion. In the same quarter of last year, the Menlo Park, California-based company reported earnings of 50 cents per share on revenue of $4.04 billion. Meanwhile, EarningsWhisper.com reports a whisper number of $0.84 per share.

As a quick reminder, Facebook reported 1Q16 earnings per share of $0.77, $0.15 better than the Street’s consensus estimate of $0.62.

Investor Focus

Investors’ focus again this quarter will be on user growth numbers as well as on online and mobile ad revenues. As of the first quarter of 2016, Facebook had “only” 1.65 billion monthly active users [MAUs], a 14.6 percent year-over-year growth. The company’s MAUs were 1.44 billion in March of 2015-a 13 percent year-over-year rise. Facebook continues to grow its user base, especially on mobile which has quickly become the core of the company’s business.

According to Verto Analytics, 236.8 million users have accessed Facebook’s services at least once during June 2016 in the U.S., giving the company a mind-boggling 96 percent reach in the US. On average, 178.3 million users accessed Facebook’s services on a daily basis in June 2016. Meanwhile, the average Facebook user spends more than 50 minutes on Facebook site, online mobile photo-sharing service Instagram, and Messenger every single day. The interesting fact about these numbers is that the company continues to get more dollars for each user that checks its site.

Earlier this year, research firm EMarketer predicted Facebook would receive 31% of U.S. advertisers display ad dollars, growing its lead over Google-parent Alphabet (NASDAQ:GOOGL), which is expected to get 14% of that segment’s market share. The social  network generated $5.2 billion from $3.3 billion in ad revenue in the first-quarter of 2016, up 57.57 percent quarter-on-quarter. Keep in mind that mobile ads, which command higher dollars than those shown on desktop, made up about 82 percent of Facebook’s advertising revenue in the first quarter, expanding 75% to $4.2 billion. It’s important to also note that Q1 is a seasonally weak quarter for the advertising market. So judging by these numbers alone, it’s obvious that Facebook’s growth isn’t slowing anytime soon as the company increases its share of the ad market, particularly on mobile devices. It wouldn’t be a stretch to say the social network is already a mobile-ad powerhouse.

Facebook Price Action

With nearly $18 billion in trailing-12 revenue, Facebook has a market cap of about $347 billion, and a stock trading at 26x its forward price/earnings ratio. Of the 43 analysts covering the stock, 38 rate FB shares a ‘Buy’, four recommend ‘Hold’, whereas the rest, only one in this case, suggests a ‘Sell’ rating. The 12-month median consensus price target is $145 with a high target of $170.

Facebook stock closed at $121 at the end of Friday’s trading session, printing a one-year return of about 27%, and year-to-date return of around 16%. The name has recovered by a 582 percent spike since tumbling to a record low of $17.7 in September 2013.

Facebook shares will continue their stairstepping upward trend as the underlying factors driving the company’s fundamentals, and consequently its growth remain firmly in place.

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