Facebook needs to beat expectations on Wednesday or it may face a near-term day of reckoning. The tech stocks has seen astronomical valuations, which has investors demanding a scale of growth not expected in any of its major rivals.
“An in-line quarter will not cut it for Facebook, the stock, as a trade.” Mahaney expects Facebook to report quarterly revenue of $5.43 billion and non-GAAP earnings per share of 68 cents.
Last quarter, Facebook crushed all expectations, posting revenue that was 9% above what the Street expected, and earnings per share 11 cents above general estimates. With such strong results it stands to reason that if Facebook doesn’t deliver another very strong quarter, one of the best tech stocks may trade flat or, worse, down a percent or 2, which could represent a buying opportunity, said Mahaney.
Many analysts believe that Facebook’s growth outlook – like Alphabet and Netflix – is extremely strong, and thus are looking for dips to buy, said Mahaney. If there appear to be any fundamental shifts in Facebook’s value proposition – such as advertisers deciding Facebook is not delivering sustained return on investment, or user engagement dropping off – it could be a sell opportunity, he said.
That puts Facebook in the hyper-growth category, and is one reason it is largely seen as a must-own stock for investors long term. RBC has Facebook trading at 24 times next year’s earnings and expects the company to grow earnings by 40 percent over the next three years. In other words, Facebook has twice the growth outlook as a Google and trades at about a third higher the multiple, said Mahaney.
“Relative to growth, Facebook is actually more attractive than Google,” he said.
“In the short-term, we expect Facebook and Google will continue consolidating the lion’s share of advertising dollars coming online with their substantial scale advantages relative to the next closest digital ad platforms,” Stifel Nicolaus analyst Scott Devitt said in a note to investors Friday.
“Google highlighted mobile as the number one driver of revenue growth in its first quarter results, which bodes well for Facebook,” said Squali.
As the number of mobile devices increase, Facebook usage and mobile ad revenue will also increase. Instagram and video ads are expected to begin to contribute meaningfully to Facebook’s revenues starting this year. Facebook Live and its messaging platforms – Messenger and WhatsApp – are likely to deliver returns within three to five years, and investments in augmented reality and virtual reality will likely begin to pay off over the longer term, said Devitt.
Oculus Rift VR platform has significant potential to change the way Facebook users communicate, and applications for education, gaming and services are likely in the future, Wedbush analyst Michael Pachter said in his earnings preview note last week.
“Competition has been slow to materialize and we believe that Facebook’s network effect and large user base all but ensure that it remains the dominant social media platform for the next decade and beyond,” he said.