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Will Facebook (FB) Beat Earnings Estimates this Season? - Analyst Blog

Zacks Equity Research

Facebook, Inc.FB, is set to release first-quarter 2015 results on Apr 22, after the closing bell. The company reported positive earnings surprises in three of the last four quarters resulting in an average positive earnings surprise of 12.81%.

Despite the not-so-encouraging 2015 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 +8.33% and a Zacks Rank #2 (Buy) makes us confident in looking for an earnings beat this quarter.

Facebook reported mixed fourth-quarter 2014 results with earnings falling short of the Zacks Consensus Estimate but revenues exceeding the same, driven by the strength in the mobile advertising market. However, for 2015, the company offered a cautious outlook given an expected slowdown in its top-line growth. In addition, margins are likely to remain under pressure as management continues to expect total non-GAAP expenses to increase in the range of 50%–65% in 2015 and GAAP expenses to increase in the range of 55%–70% from the 2014 level.

Facebook’s key acquisitions like WhatsApp and Instagram have not yet added to its top line. However, once monetized properly, these should drive growth in the future. Notably, WhatsApp touched the 800 million monthly active user mark recently — close to the company’s target of 1 a 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, given increasing mobile monetization, higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads. Facebook derived 92.7% of its total revenue in 2014 from advertisement. Additionally, Facebook has been witnessing strong growth in its Monthly Active Users (MAU) which improved 13.4% in the last quarter. Of these, Mobile MAUs remained particularly strong, growing 25.8% on a year over year basis. A research report from eMarketer suggests that mobile advertising is expected to be the key growth driver and advertisers are likely to increase their spending by 60% in 2015 to $64.25 billion. It is expected to cross $158 billion by 2018.

Facebook currently remains focused on enhancing its advertising revenues while developing its platforms like Messenger, WhatsApp, Oculus and Instagram apart from its core business. Last month, Facebook made important revelations regarding the possibilities in Messenger. The social media giant has made some impressive efforts to integrate a host of functionalities in the Messenger with an intention of providing a more holistic and rich experience to users. Recently, Facebook’s Instagram collaborated with Tinder dating app to enhance its user base thereby attracting more ad dollars to the platform. The company also partnered with WPP’s WPPGY Data Alliance to provide marketers access to data-based solutions. Additionally, Facebook has launched a new app called Riff in 15 languages on iOS and Android, which enables users to make videos up to 20 seconds long and string them together according to some pre-set theme.

Moreover, Facebook is popular in many emerging markets where most new users start with mobile. Since developed markets have relatively higher penetration rates, this positions Facebook for strong growth in the next few years. In the U.S. too, the company is likely to benefit from its strength on the mobile platform.

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 +6.05% and a Zacks Rank #2 (Buy).

PartnerRe Ltd. PRE with an  Earnings ESP of +6.10% and a Zacks Rank #2.


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