Social networking giant, Facebook (FB), is set to release fourth-quarter 2014 results on Jan 28, after the closing bell. In the last quarter, the company reported in-line earnings resulting in an average earnings surprise of 12.38% over the last four quarters.
Despite the not-so-encouraging fourth-quarter forecast offered by Facebook, street consensus continues to remain upbeat. Our proven model shows that Facebook is likely to beat earnings because it has the right combination of two key ingredients — a positive Earnings ESP and a Zacks Rank #1, 2 or 3.
The combination of Facebook’s Earnings ESP of +9.09% and a Zacks Rank #3 (Hold) makes us confident in looking for an earnings beat this quarter.
Facebook reported impressive third-quarter 2014 results reflecting its growing dominance in the mobile advertising market. However, for the fourth quarter, the company offers cautious outlook given an expected slowdown in its top-line growth. In the last quarter, management expected fourth-quarter total revenue to grow in the range of 40% to 47% year over year. This compares unfavorably with the 57.8% year-over-year revenue growth reported in the third quarter. In addition, margins remained under pressure as management continues to expect total non-GAAP expenses to increase in the range of 30% to 35% for 2014 due to growth in stock-based compensation expenses.
Facebook’s key acquisitions like WhatsApp and Instagram have not yet added to its top-line growth. However, once monetized properly, these should drive growth in the future. Notably, WhatsApp touched the 700 million monthly active user mark in January — close to the company’s target of 1 billion-subscriber base required to reach the monetization level. We believe that these investments, though not accretive to near-term growth, will help Facebook grow inorganically over the long term.
Investors are primarily focusing on the growth opportunities from increasing online and mobile advertising spending, which surged over 2014 given the increasing mobile monetization, higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads. While Facebook’s ad revenues surged 70% during the nine months ended Sep 2014, mobile ad revenues soared 114% during the third quarter and represented 66% of the total advertising revenue. According to the data available from research firm eMarketer, Facebook's worldwide mobile revenues are expected reach 75% of its total revenue (or $7.39 billion), of which a large part will be contributed by ad revenues, in our view.
Facebook currently remains focused on the emerging markets, which will offer a strong growth platform over the next few years, in our opinion. One of the pioneering strategies of the company is Internet.org. This project was initiated in partnership with major phone and equipment makers in 2013 to increase Internet usage in developing countries and, in turn, accelerate Facebook’s user base. This initiative is also helping Facebook expand its reach beyond the established markets, in our view.
Following the successful launch of Internet.org in the African continent, the company launched its free Internet service in Colombia marking its entry in Latin America.
Other Stocks to Consider
Here are some other companies that you may want to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:
Apple Inc. (AAPL), with an Earnings ESP of +2.33% and a Zacks Rank #2 (Buy).
CDK Global, Inc. (CDK), with an Earnings ESP of +15.63% and a Zacks Rank #3.
Hewlett-Packard Company (HPQ) with an Earnings ESP of +1.10% and a Zacks Rank #3.
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