Facebook Crushed Earnings — What’s Next?

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Facebook  (FB) - Get Report shares rose significantly Friday after a Thursday earnings report showed an impressive beat of expectations, but the company’s guidance leaves something for investors to wonder about. 

The stock rose 7% to $252 a share Friday, after having entered the earnings up just 1% since June 8, the start of the most recent tech rally. 

Facebook easily surpassed revenue and earnings estimates, but the border economic environment may prove the most important ingredient for the company’s recovery. 

Here were the results against Wall Street expectations:

  • Revenue: $18.7B v. $17.6B 
  • Operating Margin: 32%
  • Earnings Per Share: $1.80 v. $1.39

The revenue results decelerated to a 10% year-over-year increase from a 21% increase in the first quarter, which wasn’t impacted much by lockdowns. In April, ad revenue grew 0%. Investors had known that revenue growth had been accelerating since April, but this earnings report was proof that, not only is user engagement offsetting ad spend headwinds, but that the total revenue picture is slowly settling back towards normal growth rates. Aiding the 97% year-over-year EPS result was impressive operating leverage, as the margin was 5 percentage points higher than it was in the same period last year. 

But management said Q3 revenue will rise 10% year-over-year. Analyst are looking for ad revenue growth of 10% for the entire second half of the year, which shows a company on track to moving back towards the plus-20% growth track it has been on for the past several years. What the recovery hinges on according to management: "continued macroeconomic uncertainty, including the pace of recovery and the prospects for additional economic stimulus.” Brands spend less when their revenues are lesser, making the ad business somewhat cyclical. 

Another challenge for the revenue recovery: "our expectation that some of the recent surge in community engagement will normalize as regions reopen,” Facebook said. Of course, if the virus continues to spread and people stay inside, solid engagement trends could work in favor of the revenue picture. 

The stock is up 7% to $252 a share and trading at a relatively rich valuation, although analysts are moving estimates higher, which will keep the earnings multiple in check. 

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