Facebook Inc (NASDAQ:FB) has delivered solid numbers for the first quarter. The company has been delivering better than expected numbers in the last few years barring a one or two quarters. Last year too, the positive percentage increased steadily in the four quarters. For instance, in the second quarter of 2015, the positive percentage was 6.4% and grew to 9.6% and 16.2% in the next two quarters to reach 24.2% in the first quarter of the current year. That demonstrated the strength of the business. As a result, the stock has also been steadily seeing an increase in the past. For instance, the current year saw the stock gaining 12.56% on top of 34.15% gain witnessed last year. The stock jumped 63.6% from the 52-week low price of $72.00. Will the stock be able to provide the same kind of return in the upcoming period? Let’s look at the pros and cons of it.
Growth Rate To Slow Down
One of the factors that will haunt Facebook Inc (NASDAQ:FB) is the slowdown in the growth rate. That included in key metrics like the Daily Active Users (DAU) or the Monthly Active Users (MAU). Let’s look at some of the reported numbers in the last few quarters. In the third quarter of the year 2015, the company delivered 40.5% jump in revenue and the subsequent quarter 51.7%. The social media also reported 52% jump in its first quarter revenue on a YOY basis. There is no doubt that the average growth rate was over 50% in the last three-year period compared to the industry rate of 19.2%.
However, if Facebook Inc (NASDAQ:FB) results were looked at a sequential basis, there existed few concerns. For instance, the fourth quarter revenue witnessed 29.8% growth sequentially, which was solid considering that it was above the industry average. However, in the latest quarter, the revenue dipped 7.86% to $5.38 billion from $5.84 billion in the fourth quarter. One of the reasons was that the fourth quarter involved holiday season and ad spend would have been more. Assuming that $1 billion would have been due to the holiday season, still the revenue growth would have been only 11.2%, which was lower than the industry average. That is a clear indication that the growth rate will come down in the upcoming quarters.
Stagnant Seen
In the same way, Facebook Inc (NASDAQ:FB) will struggle to boost its DAU, as well as, MAU apart from increasing the percentage of ad revenue from mobile. For instance, in the third quarter of the last year, DAU, Mobile DAUs, MAUs, and Mobile MAUs witnessed a growth rate of 17%, 27%, 14%, and 23% respectively on a YOY basis. In the fourth quarter too, these four metrics witnessed YOY growth of 17%, 25%, 14% and 21% while the latest first quarter indicated an uptick of 16%, 24%, 15% and 21% respectively. This suggested that the company retained or added a good number of visitors.
However, Facebook Inc (NASDAQ:FB)’s sequential data indicated that DAU, Mobile DAUs, MAUs, and Mobile MAUs recorded a growth pace of 2.97%, 4.47%, 2.58%, and 3.6% respectively in the fourth quarter. Similarly, in the first quarter, these four data grew 4.8%, 5.9%, 3.8%, and 4.9% on a Q-o-Q basis. This might suggest that the growth rate was better than the fourth quarter. However, it is a fact that the growth rate is coming down. Also, whether the small percentage of the uptick is enough to provide the kind or return that it delivered in the past remains a big question. The valuations were already stretched compared to the industry average. Similarly, the company is getting 82% of ad revenue from mobile, up from 80% in the fourth quarter. It is a like stagnant situation to convert ad revenue to mobile from desktop.
Nothing Significant Stock Dividend
While announcing the results, Facebook Inc (NASDAQ:FB) disclosed its intention to issue two shares of Class C as a stock dividend one time for all outstanding shares of its Class A and B. According to the company, the objective is to ensure that it helps its CEO, Mark Zuckerberg, long-term vision and encourage him to remain as an active leader in the company. In a nutshell, the economic value of the fresh shares would be one-third of the pre-split shares. Therefore, for all practical purposes, there was no added value to it. Similarly, it did not lose its value because of the splitting the shares. However, the split planned by the social media was not a traditional one.
Facebook Inc (NASDAQ:FB) will issue one Class A shares and two fresh C shares. As a result, the voting rights also stand reduced to just one-third. A non-voting share is not going to command a great value in the market and is viewed only for the purpose of getting a dividend. It is also quite evident from the way non-voting shares are traded at a discount compared to the regular stocks. That is also indicative that the market values the voting shares more than the non-voting shares. In a way, the move could also hurt the upside potential of the stock until it is split.
Aside from these factors, the company has been involved in different fresh ventures like Artificial Reality to retain the users. However, it might take some more time to monetize some of its ongoing proposals.
Conclusion
Facebook Inc (NASDAQ:FB) is one of the stocks to hold in any portfolio. However, the stock is trading near the one-year high price. Therefore, the potential for upside rewards are limited as the valuations are already stretched and more than the industry average. It would be tough to expect the stock to deliver the same kind of return as it delivered in the past. For long-term, one can keep investing on every dip.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.