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Facebook (NASDAQ:FB) has posted their quarterly earnings report for Q3 2016 and managed to beat analyst estimates once again. Surprisingly, even though the company showed stellar growth its shares have started slipping downwards. This is driven primarily by profit taking measures by investors who expect Facebook’s growth streak to come to a halt by 2017.
Facebook (NASDAQ:FB)'s Third Quarter 2016 Quarterly Result Highlights
Before we get into the nitty gritty of things, here are the financial numbers:
- The company generated a net income of $2.379 Billion (GAAP basis) on a revenue of $7.011 Billion. Facebook’s revenue is up 56% year over year and profitability is up 166% year over year.
- Advertising accounted for $6.816 Billion in revenues and payments and other fees accounted for $195.
Operating margin has increased to 45% from 32% a year ago. - Costs and Expenses are up by 28% at $3.122 Billion, up from $3.042 Billion a year ago.
- Diluted EPS is 82 cents per share, up 165% from 31 cents per share a year ago.
- The effective tax rate remains a solid 25%
Since we are talking about a company that is a social network first and foremost, here are the operational highlights for this quarter:
- Daily active users (DAUs) were 1.18 billion on average for September 2016, an increase of 17% year-over-year.
- Mobile DAUs were 1.09 billion on average for September 2016, an increase of 22% year-over-year.
- Monthly active users (MAUs) were 1.79 billion as of September 30, 2016, an increase of 16% year-over-year.
- Mobile MAUs were 1.66 billion as of September 30, 2016, an increase of 20% year-over-year.
- Capital expenditures for the third quarter of 2016 were $1.10 billion.
- Cash and cash equivalents and marketable securities were $26.14 billion at the end of the third quarter of 2016.
Interpreting the numbers
One of the very basic factors that determine the price movements of the stock of any company is the expectation of growth. While our beloved Facebook (NASDAQ:FB) has managed to beat analyst's expectations once again, investors have started to become very wary of an impending slowdown in growth and this has started to price itself in. To be clear, at this point in time, the slump in the shares is being driven by nothing more than profit taking by investors.
Its all theoretical, and has no basis in a change in fundamentals. The problem is being further compounded by the fact that an executive (David Wehner, CFO) has stated that he expects the growth to taper off sometimes in 2017 while the company continues to post strong quarters. Whether this actually happens or not, risk aversion dictates that the probability is immediately priced in and the market corrects.
Facebook (NASDAQ:FB) shares have slumped almost a full 10% to $120 (at the time of writing) from the high of $133 just a few days back. In theory, the growth stage of any company has to end eventually but with Facebook, its heavy diversification as well as the ability to stay ahead of disruptive trends gives it the advantage. One of the shining beacons that could usher in a brand new era of growth for Facebook is the virtual reality department (Oculus Rift) which has yet to hit it off (the reasons for which are outside the scope of this article but have primarily to do with high product cost, high platform cost and lack of killer apps).
The company's mobile ventures, like always, are quick to adopt and assimilate any potential disruptive trend. Whatsapp was acquired, Snapchat functionality was integrated in and recently Prisma's AI filters are in the pipeline as well. Where other companies usually go for a wait-and-see approach, Facebook gets ahead of the trend first, and asks questions later.
A very recent example of this is the Prisma App, which disrupted other filter apps by using an AI based filter portfolio. It was miles ahead of any traditional filter app and Facebook just one-upped it by introducing the same AI based filter style, for videos, which is something not even the original Prisma can do. The company (NASDAQ:FB) has a very healthy fear of being rendered obsolete by a disruptive app - and this is probably one of its strongest characteristic.
