Fin 3033.002 Fall 2016

November 2016 1

Facebook Earnings report

Viet Nguyen

Expectations of a strong 3Q by analysts were proven to be right when

a higher than expected EPS was reported. With growth in Facebook’s mobile

advertising business, user growth, and more, there are chances that facebook’s growth

may lead to a higher expected revenue for the full year.

Introduction

he earnings report for Facebook

shows strong signs of growth.

Facebook seems to be in a bullish

direction with an higher than estimated EPS

(ADJ), Net income(ADJ), and slighter

higher actual revenue than expected.

With a high demand for mobile ads along

with consisitently growing monthly and

daily users, there has been an accerelated

revenue expansion. On November 2nd, 2016

EPS (ADJ) was reported at 1.090, which

was higher than the estimated 0.974..

Revenue was $7.011B which was 90M more

than the estimated revenue. Net Income

(ADJ) also show strong signs of growth with

an estimated $2.832B and actual report of

$3.168B which shows 11.9% surprise.

Last year’s Q3 reported an EPS(ADJ) of

0.57, and with this year’s Q3 almost

doubling at 1.090.

Top line growth

The graph above was provided by

Facebook showing the $7.011B in revenue

in Q3’16. $6.816B in revenue is from

advertising and $195M in revenue was from

payments and other fees. Since last year’s

Q3, there has been a 55.8% growth in

revenue. The third quarter for the past 5

years has had an average revenue growth of

49.44%, meaning Q3’16 exceeded the

average growth rate by 6.36%. I predict that

next year’s Q3 should grow in revenue if the

T

Principles of Investments

September 2016 2

company continues to earn money from

advertising.

Bottom line growth Facebook has 1.79 billion monthly

users which has helped with a successful

Q3, earning $7.01B in revenue and 1.09

EPS. Facebook’s EPS and Revenue growth

seemed to grow at a steady rate compared to

each other, showing that margins neither

expanded nor narrowed. The graph below

from Bloomberg shows the growth rates of

both revenue and EPS(ADJ).

Facebook’s gross margin grew from 85.77

to 85.92 which was minimal.

Market Reaction Once EPS was reported on

November 2nd, Facebook fell 1.09% in

stocks and the S&P500 also fell 1.65%.

What I found interesting was that during

after-hours Facebook’s shares dropped

nearly 7% to $118.69. The Market showed

no surprise with Facebook’s price drop.

As seen on the line graph from Bloomberg

there is a dip at the end of the graph showing

the after-hours effect on the stock. Dropping

7% right after a positive EPS and Revenue

report was somewhat surprising to say the

least.

Manager and Analysts

comments Facebook’s CFO David Wehner

expects that since the company is lapping

strong quarters that revenue growth rates

will start to decline with upcoming quarters.

Also the company said they could have

increased cash outflows by $1.8B through

September if they altered its tax approach to

its employee equity awards in 2017. There

are some analysts that seem to see light

within the 7% stock price drop, Victor

Anthony said Thursday after EPS report,

“Facebook’s warning of slowing

growth in 2017 could be a gift to investors

looking to jump into what is still a lucrative

boat.”

With mobile ads a driving factor of

Facebook’s growth, there is definitely room

to make money within the years to come for

Facebook. David Werner had a few words to

say about Facebook’s growth,

“The real story here is just the core

mobile business on Facebook, that’s what’s

driving the growth—Mobile’s been just a

phenomenal growth driver for us, we didn’t

have a mobile business three years ago, and

Principles of Investments

September 2016 3

that’s now three quarters of our ads

revenue.”

Conclusion With a much more optimistic EPS

report for Q3, Facebook seems to be relying

heavily on Ad revenue and CFO David

Wehner expresses that mobile ad revenue is

a huge factor for revenue. With an

increasing EPS within the past five years, I

predict for Q4 that EPS will continue to

grow even with the stock price drop. There

is room for investors to take advantage of

the slowing growth to come ahead and

capitalize on the bullish company but overall

Facebook will continue to surprise and grow

steadily. I also wanted to see how Facebook

compared with other social Medias so I

compared the company with twitter. Twitter

has remained stagnant with -0.15 EPS and

has shown no growth since Q1’14. Linkedin

has taken a dip in EPS in Q2, but in Q3 is

growing towards a peak with an EPS of 0.06

from -0.9. With all three of these companies

growing in revenue, Facebook shows the

most growth, but Linkedin also shows

promising signs of growth with an

increasing EPS and revenue.

The line charts above show Twitter,

Facebook, and Linkedin. The green line is

EPS and white line is Revenue.