Can Facebook earnings top sky-high expectations?

The company is growing, but it needs to grow fast enough for the uber-excited bulls.

By InvestorPlace Apr 22, 2014 11:28AM

Caption: The Facebook logo is seen on a tablet screen
Credit: © Lionel Bonaventure/AFP/Getty ImagesBy Jeff Reeves

Facebook (FB) has had a busy start to 2014. Earnings blew the doors off in January, the stock is up 8 percent despite a small loss for the broader S&P 500 Index ($INX) and the company has rattled off a bunch of big-time acquisitions.

But for the next few weeks, Facebook shareholders will be most concerned about the balance sheet instead of the drumbeat of headlines and daily FB stock charts.

That's because the biggest catalyst for FB stock performance lately has been its blowout earnings and revenue growth posted at the end of January; FB stock gapped up by double-digits the next day as a result and has stayed strong ever since.

So what's in store this time when Facebook earnings hit Wednesday?

Tough expectations

The question investors need to ask is whether that rate of growth is enough to top what are increasingly becoming very high expectations for the social media giant and CEO Mark Zuckerberg.

Growth is not a problem. Facebook earnings are up against a revenue target of $2.35 billion on the quarter, growth of over 60 percent year-over-year but down slightly quarter-over-quarter; the consensus EPS target is 24 cents per share, roughly double last year's number and up modestly from the 20 cents per share reported in January.

Hitting those targets might not be all that hard, either. After all, Facebook has handily topped expectations in the past -- including beating EPS targets by 30 percent in its October earnings report, with little fanfare to follow.

Instead, FB stock has to not just show growth that meets Wall Street forecasts, but numbers that really wow investors.

If Facebook manages to see its revenue stay steady in the face of seasonality and the prediction of a decline, FB stock could be off to the races again.

But if the slowdown hits as expected and the details disappoint? Well, Facebook earnings simply hitting the mark may not be enough after the stock has raced up 120 percent in the last 12 months.

Facebook earnings could be big either way

For the record, I have a horrible history of predicting Facebook earnings. I figured that Q4 numbers would be ugly in January based on a few factors including:

  • The possibility of declines in North American or European users, which are the most valuable to the stock
  • Trouble with online ad rates, as evidenced by continued struggles at Google (GOOG), Yahoo (YHOO) and AOL (AOL) to increase their "cost per click" -- that is, the rate that these websites can charge advertisers.
  • Waning sentiment, from both investors and consumers who think Facebook is now getting "uncool."

I still think these three pressures are big ones for FB stock in the long-term.

But as for Facebook earnings Wednesday? Well, they may not be troublesome just yet.

For investors, then, the real thing to watch is going to be whether Facebook revenue impresses and avoids the modest sequential decline that many are looking for, or whether it indeed posts a sales slowdown that could be seen as a big negative if other details aren't all that grand.

Although I don't own the stock personally, my two cents is that we'll see a rather solid earnings report that fails to prompt a breakdown or a breakout and simply maintains the course.

I could be wrong and Facebook earnings could blow the doors off again, but I don't think that's very likely given the pressures on the business and the prediction of quarter-over-quarter declines.

I also could be wrong the other way should the stock miss the mark widely.

And if this latter scenario is the case, it could be off to the races to the downside.

More from InvestorPlace

Jeff Reeves is the editor of and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities.



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