Facebook (FB) Q2 Earnings Preview

by Dan July 27, 2016 9:47 am • Commentary• Trade Ideas

Event: Facebook (FB) reports Q2 results tonight after the close. The options market is implying about an 6% one day move tomorrow (above last quarter’s 8% implied move), which is shy to the 4 qtr average of about 7%.

Price Action / Technicals:  As I write, FB is trading at a new all time high, up nearly 17% on the year, and up 37% from its 2016 lows made in January.

The technical set up is quite simple. The stock is consolidating at all time highs. And those new highs are just above what were past resistance levels. If the stock has a reason to move higher (which I suspect it will) then it will be once again in uncharted territory with no overhead resistance.  If the stock were to fail here, then obvious technical support is at $110, back towards its 200 day moving average:

[caption id="attachment_65312" align="aligncenter" width="600"]FB 1yr chart from Bloomberg FB 1yr chart from Bloomberg[/caption]

Sentiment: much like AAPL & GOOGL, Wall Street analysts are scared shitless to be off-sides on FB sentiment while it goes higher, with 44 Buy ratings, 5 Holds and only 1 Sell with a 12 month price target of $145ish, or nearly 18% above its current levels.

Expectations and what to watch for from RBC Capital’s Mark Mahaney: 

1) User Growth and Engagement – In Q2:16, we are estimating Y/Y MAU growth of 14% to 1.70B, with a Q/Q rise in the DAU/MAU ratio to 66.1%, 10bps above Q1:16’s record high.

2) Advertising Revenue Growth – Facebook saw ad revenue growth of 63% (ex-FX) in Q1,
3-point deceleration on a 3-point easier comp. In Q2, FB will face a flat Y/Y Advertising revenue comp (ex-FX), and we are modeling a Q2:16 Ad revenue growth rate (ex-FX) of 55%.

3) Margin Levels – For Q2, we are looking for a 53% non-GAAP operating margin again, down 200bps Y/Y. We note management reiterated non-GAAP opex guidance of 45-55%.


My View Into the Print:  Regular readers know that I am a long term skeptic when it comes to FB’s uncontested dominance (read here). But Zuckerberg and Co are pushing all the right buttons near term, given the pass from investors, Wall Street analysts and their ever increasing stock price. People said they were “nuts” to buy Instagram for $1 billion in 2012, they were “nuts” to buy Oculus Rift in 2014 for $2 billion and they were nuts to buy WhatsApp for nearly $20 billion in 2014  (well they really may be nuts on that one). But they have been skating to where the puck is going, not where it has been. Instagram is worth about $35 billion, Oculus is the driver for that will be their massive push in VR and WhatsApp is possibly the vehicle (now 1 billion users strong) into mobile epayments.

So it’s has been and probably will be one of the handful of winners in Web 3.0. But it’s still a stock. And at some point soon, FB’s eye-popping revenue growth will decelerate greater than expected, monetization will be less than expected, and costs will be greater than expected. The stock will gap 10% lower as investors with massive gains, and long memories will shoot first and ask questions later. They know it is one of the most crowded trades in tech. I have no idea whether that will happen tonight, or on their Q3 call in Oct or their Q4 call in Jan17, but it will happen, but possibly from much higher levels. Think of that as a warning based on how “special” investors view FB as a stock. There are no special stocks.

With a nearly $350 billion market cap, it ranks in the top 10 largest companies in the world behind Apple, Alphabet, Microsoft & Exxon, and switching spots daily with Amazon and Johnson & Johnson.  That’s truly astounding when you consider FB is expected to book $26 billion in sales in 2106, vs $216 billion for AAPL, $71 billion for Alphabet, $94 billion for Microsoft, $227 billion for Exxon, $134 billion for Amazon and $72 billion for Johnson & Johnson.  I know, I know they are growing sales at 45% a year, have a near monopoly with 85% gross margins, what could go wrong? The answer is lots. But again, from where?  GOOGL’s sales are expected to increase 17% this year to $71 billion and trades at 7.2x those expected sales, FB’s are expected to rise 45% to $26 billion and it trades nearly 2x on a multiple of sales at 13.2x.  I might have said the same thing at every all time high before FB was about to report over the last year, but I’d prefer to own GOOGL over FB as one is priced to perfection and the other is priced for growth at a reasonable price.

I am not sure how helpful that is. Facebook’s been a great story. I’ve been too skeptical. But I will say that for those looking to pick a direction, much like in AAPL as described on Friday’s Options Action on CNBC (watch here), options prices look relatively cheap for the event.

We’ll be back with some ideas.