With Facebook’s stock rising by 30% over the last six months due to impressive results, many investors will be on their heels on October 28, to see if the companycan keep its growth momentum intact with Q3 2014 earnings. The company posted 61% revenue growth in the second quarter, along with a 17 percentage point improvement in the GAAP operating margin. We expect the company to show solid results in the third quarter as well, fueled by its strategy to focus on mobile devices, improve ad products and grow the number of marketers on the platform. However, the growth rate could slow somewhat in sequential terms in the third quarter due to tougher comps.
While we expect profitability to improve in the third quarter as well, we’d like to remind investors that various factors such as incremental operating costs due to closing of WhatsApp and Oculus acquisitions, along with rise in core operating expenses will weigh on the company’s profitability post Q3. In terms of revenue growth, we believe there is huge long-term potential for the company to expand its advertising revenue from the U.S. and abroad. Building out the eco-system (which comprises of several entities such as WhatsApp and Instagram) and enhancing online video advertising will further propel top-line growth for the company in the long term.
Our price estimate for Facebook stands at $65.50, implying a discount of about 20% to the market. We forecast Facebook’s revenue and EBITDA to grow meaningfully from $7.9 billion and $4.9 billion in 2013 to over $42 billion and $30 billion by the end of our forecast horizon (i.e 2021) in our model.
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