If Facebook Dips on Earnings, It's a Buying Opportunity

 | Jul 25, 2017 | 9:00 AM EDT
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Facebook (FB) is scheduled to report its fiscal 2017-second quarter earnings after the close on Wednesday, and investors are anticipating a blowout quarter. Year to date, shares of Facebook, which is a holding in the Action Alerts PLUS portfolio that Jim Cramer co-manages as a charitable trust, are up more than 43%.

So, after the run the stock has had, can Facebook go much higher?

Recall that first quarter revenue was about 2.5% ahead of consensus expectations at $8.032 billion. Earnings of $1.04 were sharply ahead of the $0.87 Street estimate, because user growth remained stronger than expected throughout the first quarter. In fact, momentum at Instagram carried the day. Instagram now has over 200 million daily active users.

The only disappointment in the quarter was a GAAP operating margin of 41%, which was below the 42% expected and down sequentially from 52% reported in the fourth quarter. Facebook margins have been under pressure because of heavy R&D spending and aggressive headcount growth. In the first quarter, Facebook grew headcount 38%. Analysts do not expect Facebook to hire as aggressively in the second quarter. Capex in the first quarter was up 12.3% to $1.27 billion.

Analysts are looking for Facebook to post second quarter earnings of $1.11 on $9.193 billion in revenue.

One metric investors will be watching closely is price per ad. In the first quarter, ad revenue was $7.85 billion and price per ad was up 14%. Most analysts were modeling a more modest increase, but ad supply is not growing as fast as it did in the past and higher spending on more expensive video ads pushed up the price per ad. It continues to be much less expensive to advertise on Facebook than Google GOOGL. In the second quarter, analysts are expecting ad pricing per thousand ads between $1.97 and $1.99.

Growth in Asia and Rest of World (ROW) was a big driver of the first quarter. Asian revenue grew 60% and ROW was up 66%. Analysts will be looking to see if Facebook can keep its overseas growth in the mid-to-low 60s.

Total revenue growth in the United States and Canada slowed from 53% in the fourth quarter to 45%, so investors will be watching that metric closely. Was it a fluke or is growth moderating as Facebook matures in the U.S.?

Investors will be watching desktop revenue. It grew just 22% last quarter and is expected to slow throughout the year, as users shift to mobile apps.

First quarter monthly average users (MAU) grew a staggering 17% year over year to 1.93 billion. Daily active users (DAU) were 1.28 billion, up 18% and were ahead of every analyst estimate. For the second quarter, analysts are looking for MAUs of 1.98 billion and DAUs of 1.3 billion.

Management is expected to guide the third quarter to a mid-point of $9.6 billion and earnings of $0.97 per share. For the full year, revenue is pegged at $38.6 billion, up 39.6% and earnings should land at $4.88. Next year, the consensus is looking for revenue to increase 28% to $49.5 billion.

Back in March, I was bullish on Facebook. Facebook continues to be a juggernaut and it's hard to jump in front of the stock.

For investors with a long-term outlook, I would stay long and add to the position on any dips or short-term disappointments.

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