Let’s analyze what we expected from Facebook prior to their 2nd quarter earnings report and what eventually transpired. This way, we can get a better read on how the company might perform moving forward, throughout the third quarter, and up to the release of their third-quarter earnings statements.
What did we know about Facebook before their last report?
1. We knew that Facebook shares had gained more than 18% over the previous three months.
2. We knew that Facebook became the fastest company to hit a $250 billion market cap, doing it in just over 3 years – handily beating Google, which took 8 years.
3. We knew that Facebook usually beats Wall Street expectations – only missing out once since 2012.
4. We knew that Facebook monthly active users were up 13% year over year in the last quarter – up to 1.44 billion – more than the population of China.
5. We knew that mobile growth was a key measurement for Facebook, and that indeed, daily mobile users had increased 31% year over year, with 798 million daily mobile users.
6. We knew that in the first quarter of 2015, Facebook's revenue surged by 42%.
In relation to the advertising revenue, this was particularly important, since it also represented a strong push in mobile advertising. In fact, mobile ads represented 73% of total ad revenue. This was partially supported by a substantial increase in time spent on Facebook and according to a comScore report, the total minutes spent on Facebook rose 27% year over year. Facebook made a huge push to go mobile with Messenger, as well as with its purchases of WhatsApp and Instagram. Thus mobile advertising was one place that they really wanted to see strong growth (which they expected to continue).
Heading into the 2nd quarter earnings report, investors seemed to be cautiously optimistic about Facebook’s direction. They certainly liked Facebook’s giant user base, as well as the inroads they had made in mobile advertising. They wondered, however, whether the stock might be a little bit overpriced, and were also a little nervous about the operating costs and investments that Facebook had made – including slightly riskier projects such as Internet.org and drones.
What was the result of the 2nd quarter earnings report for 2015?
Facebook had some great figures to report. User engagement – especially via mobile, continued to rise: daily active mobile users increased from 798 million in Quarter 1 to 844 million in Quarter 2 (with the biggest leap occurring in the Asia-Pacific region)v. Monthly active users also rose from 1.44 billion in Quarter 1 to 1.49 billion in Quarter 2.
Total revenue grew by 39% year over year, and advertising revenue grew by 43%, from 2.67 billion last year, to $3.83 billion this year. Total revenue increased substantially from Quarter 1, as well, from $3.32 to $3.83 billion. And perhaps even more telling and important, mobile ad revenue continued to rise as expected – from 73% of all ad revenue in Quarter 1, to 76% in Quarter 2.
Costs were well up – by 82% from last year, going from $1.5 billion to $2.77 billion.
All in all, Earnings per Share (EPS) were $0.25 (GAAP) and $0.50 (non-GAAP) respectively, slightly higher than the 47-49 cents per share that analysts had predicted1. However, despite beating expectations, the stock still dropped by as much as 4.6% following the earning release, before recovering and balancing out a little.
What does the future hold?
Overall, the future looks quite bright for Facebook: Despite the sky-high expenses for the quarter and low operating margin, for a successful company like Facebook, pouring money into research and development and other investments, may not be such a bad idea.
In addition, we know that Facebook is successful in many ways, because unlike Twitter, which is struggling to grow its user base, user engagement with Facebook keeps increasing. In fact, Mark Zuckerberg stated during the company’s earnings call, that people spend an average of 46 minutes per day on Facebook, Instagram, and Messenger.
Also, in regards to earnings concerns, it should be noted that currency exchanges played a big factor this quarter. Excluding year over year changes in currency exchange rates, ad revenue would have increased by 55% and total revenue would have increased 50%.
Another thing playing into Facebook’s favor is the Oculus rift, Facebooks virtual technology and first foray into a physical product. Hype is building, and the Oculus is set to be released to the public in the beginning of 2016. It stands to be a game-breaker for Facebook, although since a physical product is new territory for the company, it remains to be seen how Facebook will deal with manufacturing, delivery, and other aspects of a business that it did not needed to contend with previously.
Additionally, Facebook still has a great deal of Instagram advertising potential to tap into, which could potentially be another huge boon for the company moving forward.
Summing up all of the above, despite the weak gains Facebook made this quarter, there seems to be a lot to get excited about moving forward, and traders should closely monitor how Facebook’s new areas for profit (Instagram, drones, Internet.org, and Oculus) are accepted by the public in the short term.
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