NEW YORK (TheStreet) - Facebook (FB) said the road ahead will get tougher as growth rates at the billion-member social network slow. Analysts covering Facebook, however, shrugged off those concerns. UBS, on Thursday morning, reiterated a valuation of Facebook that would nearly make it one of the ten largest companies in America by market capitalization.
There are two basic facts from Facebook's first quarter earnings and, of course, a lot for investors, analysts and the media to speculate upon.
Facebook unequivocally said a launch of News Feed ads in 2013 will cause future quarters' year-over-year growth rates to slow as comparable hurdles become more difficult. "[We] continue to expect that over the rest of 2014 our year-over-year ad revenue growth rates will decline from the Q1 rate and be meaningfully lower by the end of the year," Facebook said.
For a company that trades at a price of almost 50 times estimates of its 2014 earnings per share, and over 30 times estimated free cash flow, such tempered guidance could cause a high-flying stock to tumble.
Not so for Facebook.
Another fact is Facebook posted far better-than-expected first quarter results, highlighted by a 82% year-over-year rise in advertising revenue, and an over 100% increase in quarterly free cash flow to nearly $1 billion. Mobile engagement trends at the social network are impressive by almost any measure.
Perhaps Sheryl Sandberg, Facebook's chief operating officer, best communicated why optimism runs high inside Facebook and on the outside.
Citing specific Facebook campaigns run by Canadian retailer Sport Chek and ice cream company Ben & Jerry's, Sandberg outlined how companies can use the social network for an industry-leading return on advertising dollar spent. Sandberg's discussion indicated Facebook may emerge as an advertising tool so crucial to businesses' bottom lines it may eventually garner comparison to Google (GOOG).
"We have a great opportunity to build the world's first platform for personalized marketing at scale. It's early in that journey and we're going to stay focused on making the right investments in our ad business and executing against our plan," Sandberg said.
The Plan Is Working
In prepared comments, Sandberg outlined how Facebook executed on its marketing plan. The comments give insight as to why analytic models of Facebook's financial performance may soon change to distinguish between all of the company's various tools such as News Feed, Paper, Instagram and future efforts such as WhatsApp and premium video.
In the past 12-months, Sandberg said Facebook focused on its proprietary targeting tools to help advertisers improve the effectiveness of their ad campaigns, directly reaching target audiences. Ten times more marketers are now using Facebook's Custom Audiences feature than the first quarter of 2013, Sandberg said.
That would be a positive across Facebook's burgeoning ecosystem. The more Facebook marketers use targeting tools like Custom Audiences, the more relevant those ads become to Facebook's users.
Sandberg also said Facebook is simplifying its ad tools so that smaller companies can find a benefit in Custom Audiences and Partner Categories .Those tools are now available in a self-service ad creation process. For direct response marketers, Facebook now includes 'buy now' or 'install now' buttons that improve the efficacy of their ads.
Facebook's investment measurement tools are also improving, Sandberg said. Online conversion measurement tools now enable direct response advertisers to measure the impact that Facebook campaigns have on sales. "[We] recently launched new offline conversion tools to measure in-store sales, which have yielded positive initial results," Sandberg said.
The development of new products like premium video, ads on Instagram and a recently launched ad network test could expand Facebook's marketing platform. Those projects, however, won't be seen in 2014 earnings, Sandberg said.
Let's Talks About 2014 Earnings
Facebook beat first quarter forecasts on revenue, earnings and margins. Revenue for the first quarter of 2014 totaled $2.5 billion, an increase of 72%, compared with $1.46 billion in the first quarter of 2013. First-quarter revenue of $2.36 billion was expected, according to Thomson ONE Analytics.
Earnings before interest, taxes, depreciation and amortization (EBITDA) rose over 100% year-over-year, an acceleration from the fourth quarter, while non-GAAP operating margins that exclude stock-based compensation came in at 55%, exceeding Oppenheimer estimates by nearly 8%.'
Free cash flow for the quarter rose to nearly $1 billion.
In spite of cautious comments about future quarter results, Oppenheimer analysts increased their 2014 and 2015 revenue forecasts by 6% each and EBITDA forecasts by 7%. They reiterated a 12-18 month price target of $79 a share.
UBS has Wall Street's highest price target at $90 a share and said "Facebook has emerged as a co-leader with Google in global digital advertising (and increasingly advertisers are framing the issue that way to us)."
They moderately boosted full-year 2014 revenue estimates by $100 million to $12 billion, and adjusted EBITDA estimates to $7.77billion from $7.40 billion. "[We] expect Facebook to outgrow global digital advertising for the next few years as existing/developing ad products aim to better monetize the time spent and sheer size/scale of Facebook's user platform," UBS said.
Given the prospect of stock-based dilution, UBS's $90 a share price target values Facebook at a market cap of nearly $250 billion, within the pantheon of the ten largest companies by market cap in the United States.
Credit Suisse Changes Forecasting Model
In a note prior to earnings, Credit Suisse analysts said they are changing their valuation model of Facebook to better incorporate price differentiation among the social network's growing advertising channels.
Instead of simply valuing Facebook on its average revenue per user times 1.28 billion monthly active users MAUs and over 1 billion mobile MAUs, Credit Suisse now wants to incorporate forecasts for Facebook's different platflorms such as News Feed, premium video and Instagram.
Credit Suisse said that changing forecasting metric will properly identify Facebook's upside in coming years as novel products such as WhatsApp and video content are rolled out.
A Rabbit Turns to a Hare
If Facebook's revenue grew at 82% in the first quarter, Citigroup analysts said they now believe revenue will grow about 50% for 2014 and at about 40% in the second half of 2014.
In 2015, Citigroup forecasts revenue growth will tumble to 29%, or just over $14 billion, indicating a significant slowdown. Facebook's GAAP and non-GAAP earnings per share are forecast by Citigroup to be $1.25 and $1.58 respectively. Given a $85 a share price target, those estimates mean Citigroup is comfortable valuing at 68 times 2015 GAAP EPS over 50 times adjusted EPS.
Bottom Line: Facebook is delivering strong results. Led by communication from Sheryl Sandberg, the company's marketing capability is now evident and is turning to a parallel to Google. Analyst expectations, however, are rising far faster than management's cautious guidance.