Facebook Inc. Pre-earnings Review

Edited by Vani Rao

Acquisitions aimed at increasing user base and ad revenue

Facebook Inc. (NASDAQ:FB) is one of the largest social networking services provider, its name comes from a directory colloquialism given to students at some American universities. The company is set to announce its first quarter results on April 23, 2014. Recently, Facebook announced the acquisitions of WhatsApp and Oculus, which are expected to have a huge impact on earnings during the first quarter ended March 31, 2014.

In its initial public offer (IPO) launched on February 1, 2012, Facebook had raised $16 billion, which made it the third-largest IPO in the US markets. Initially, the company’s stock struggled to stay above the IPO price; however, in early 2012, the stock witnessed a steady uptick, providing good returns to investors. Facebook has been reporting steady growth in net income over the past few quarters. Its market capitalization was at $153.26 billion as on April 15, 2014.

Performance in previous quarters

During the quarter ended December 31, 2013, net income increased by 20.94% to $514 million as compared to the year-ago period, mainly due to a growth in advertising income. Total revenue increased to $7,872 million, up 54.69%, compared to $5,089 million in the year-ago period. The total assets of the company amounted to $17,895 million, 18.49% higher than the previous year. On the other hand, total liabilities decreased by 27.57% from $3,348 million in December 2012 to $2,425 million in December 2013. The company’s revenue has surged 28.27% on a QoQ basis to $2,586 million for the quarter ended December 31, 2013. Revenue jumped by 63.15% on a YoY basis.

As on Tuesday, April 15, 2014, the company’s PE ratio stood at 100.00, compared to the industry average and S&P 500 PE ratio of 37.70 and 18.00, respectively.

Source: Bloomberg/WSA
Source: Bloomberg/WSA

Facebook Inc.’s last one-month price movement

Source: Bloomberg
Source: Bloomberg

The above chart shows the price movement of the Facebook’s stock during the last one month. There has been a downward movement in the stock price as shown in the graph. The stock is following the movement of the broader NASDAQ index, which has also witnessed the same trend during the last one month.

Fourth-quarter 2013 earnings recall

During Q4 2013, Facebook reported revenue of $2.59 billion, an increase of 63% compared with $1.59 billion in Q4 2012. GAAP net income was $523 million, compared to $64 million in Q4 2012. Non-GAAP net income was $780 million, up 83% compared to $426 million for the year-ago quarter. Furthermore, GAAP diluted EPS was $0.20 in Q4 2013, compared to $0.03. Non-GAAP diluted EPS for the fourth quarter was $0.31, up 82% compared to $0.17 in the year-ago period. The company has not declared any dividend in the past.

Outlook for first-quarter 2014

For the first quarter ended March 31, 2014, Facebook’s revenue is forecast at $2.35 billion on earnings of $0.24 per share according to Bloomberg consensus. Operating margins are expected to decline from $1.33 billion to $1.03 billion. Moreover, the weakening of the dollar against a basket of global currencies will have a positive impact on the revenue.

Facebook acquisitions during the quarter

On February 19, 2014, Facebook has announced acquisition of WhatsApp Inc., a smartphone instant messaging software, for $19 billion, which is the highest ever acquisition for a venture-capital backed start-up. The acquisition bears importance since WhatsApp is mainly a mobile app and Facebook can extend its advertising on the mobile platform with this acquisition. This could in turn increase Facebook revenue from mobile advertising in the future years.

Another acquisition by Facebook is Oculus, a virtual reality company, for $2 billion. The technology could find its way into Facebook to create the most social platform ever.

Declining daily user base

Facebook is facing a negative trend in its daily user base; the number of Facebook users in the US and Europe are steadily declining due to various factors. Moreover, when Facebook announced the acquisition of WhatsApp, on the same day, the company’s shares fell by 5%. This is mainly because industry experts feel that the acquisition cost is too high since there are other social networking tools or software available in Android and iOS market for phones and tablets. Most importantly, the declining user base and the dwindling number of active users could hurt revenues going forward.

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