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Here's Why Investors Are So Impressed With Facebook's Earnings

Matthew Frankel, CFP, The Motley Fool

Social networking giant Facebook (NASDAQ: FB) just reported its first-quarter earnings, and to say that investors appear to be impressed with the results is an understatement. Prior to the stock market's opening bell on Thursday, shares were up by approximately 9%.

While some of this is likely due to the company's earnings and revenue numbers coming in above expectations, there's a lot more to the story. Here's a rundown of what investors need to know about Facebook's first quarter and why the results are so impressive.

Sign at entrance of Facebook's headquarters.

Image Source: Facebook.

The headline numbers

The top- and bottom-line numbers never give the full picture of how a company is performing, but it's worth pointing out that Facebook beat expectations on its top and bottom lines. Revenue of $15.08 billion was about $100 million more than analysts had projected, and earnings per share of $1.89 (excluding a big one-time charge) handily beat estimates of $1.62.

Impressive growth in users and revenue

Digging a little deeper, it appears that Facebook continued to grow its user base and revenue stream. The company's 2.38 billion monthly active users not only beat expectations slightly but represent 8% year-over-year growth. Daily active users also grew at the same rate. For a relatively mature social networking company, adding 178 million monthly active users year over year is an impressive achievement.

Growth in North America and Europe was mild, as is to be expected from the company's more saturated markets, but it was quite strong throughout the rest of the world. In fact, Facebook's daily active user base in Asia grew more than 13% from the first quarter of 2018.

Perhaps more importantly, Facebook is doing an excellent job of monetizing its users. The company generated $6.42 on average for each of its users, which was ahead of expectations and 16% higher than a year ago. It's also important to note that there's a tremendous gap between average revenue from a North American user ($30.12 in the first quarter) and users elsewhere. Facebook's average European user generated $9.55 in revenue, while users from the company's Asia-Pacific region and the rest of the world produced average revenue of only $2.78 and $1.89, respectively. Users outside North America and Europe represent about 70% of Facebook's daily active users, though, so it's fair to say that there's still lots of room to grow revenue.

Facebook is anticipating FTC punishment

One other item of note in Facebook's report is that the company is setting aside $3 billion in anticipation of a potential fine from the Federal Trade Commission (FTC) stemming from privacy violations.

The fine could end up costing even more. "We estimate that the range of loss in this matter is $3.0 billion to $5.0 billion," the company said in a news release. However, Facebook pointed out that this is still an unresolved matter, so there's no way to know for sure how much a fine will actually cost.

While this sounds negative on the surface, it could actually be a relief to investors to have some solid numbers here. Markets love clarity, and while Facebook's FTC issues are far from settled, this could help investors breathe a sigh of relief.

A strong first quarter in spite of privacy concerns

It's important to remember that this growth took place even as Facebook was receiving waves of negative media coverage over its privacy practices. When the Cambridge Analytica scandal was first revealed in 2018 and followed up by hearings in the U.S. and Europe where CEO Mark Zuckerberg faced questions from lawmakers about data policies, there was widespread concern that privacy issues would end up costing Facebook users and revenue.

In all, Facebook shares lost more than 25% of their value in 2018 as privacy issues and the costs associated with fixing them served as a major downward catalyst. Fortunately for investors, these solid first-quarter 2019 numbers show that Facebook may still be quite durable in spite of any persisting privacy concerns. 

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.