In the last year, shares of Facebook (FB) are up 28%. There's little question this will be another monster quarter, but comparisons are getting tougher going forward. Facebook reports after the close on Wednesday.
With more than 4 million advertisers and 1.7 billion monthly active users, Facebook is expected to report a strong third quarter. Revenue should benefit from the Summer Olympics, the election and strong Instagram ad growth. About 86% of revenue should come from mobile.
However, I think investors should begin to worry about tough comparisons going forward. Any ad revenue slowdown could pinch the performance of the stock.
For the third quarter, analysts are looking for revenue of $6.9 billion, which would be up 55%. Earnings estimates of $0.97 per share are probably $0.05 to $0.07 low, because average ad price per thousand should be up about 8% as the quarter was packed with lots of ad-friendly events. Recall that ad pricing grew 9% last quarter, so even the 8% estimate might be low. The consensus is looking for EBITDA of $4.27 billion.
Investors will be watching daily active users (DAU) and monthly average user (MAU) metrics. MAUs are expected to be up 14% to 1.76 billion and DAUs up 16%. Analysts like to watch the ratio between daily active users and monthly users. The ratio has held steady at 66% for the last couple quarters.
For the full year, analysts are looking for revenue of $27.1 billion and earnings per share of $3.97.
Since this is the third-quarter report, investors will turn their attention to the first half of fiscal 2017. Right now, analysts think 2017 revenue only will grow 35%, which would be down from 53% in 2016. Likewise, analysts estimate earnings only will be up 31% in 2017 versus 79% in 2016. And that's the problem.
In the first half of 2016, quarterly ad revenue grew 57% and 63% (ex-foreign currency each quarter was up 63%). That's a tall order for the first half of 2017.
Facebook still has a lot of levers to pull. The company has several business lines that are in the early stages of monetization. For example, Instagram, live video streams, WhatsApp Messenger, Search, Workplace (enterprise collaboration platform) and its new local classified ad platform called Marketplace all could be monetized further. Marketplace allows users to post classified ads and could become a threat to eBay (EBAY) in a few years.
At the current price, Facebook is trading around 26x 2017 earnings estimates of $5.06 a share. With only 35% revenue growth and 31% earnings growth expected for next year, stock appreciation could start to get tight, especially if there are fewer blowout quarters.
As Facebook's growth has slowed, the company's multiple has been compressed. In 2012, FB was able to sport a 50x multiple. Even as early as last year, it was not unusual to see FB trade more than 30x forward estimates. That was then, this now. FB has been trading from 25x to 27x estimates all year.
If the company can't find new ways to monetize its users, its multiple may come down further and share appreciation may slow.