Facebook Inc. Earnings Preview: Slowdown Coming or Sustained Growth Ahead?

By Markets Fool.com

Source: Facebook.

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Facebook is scheduled to report earnings on Wednesday, Jan. 28, after the market close. The stock is up by more than 30% over the past 12 months on the back of impressive financial performance through the year. However, management expects slowing revenue growth and higher expenses in the fourth quarter, and this could be cause for concern among shareholders.

Lets look at the coming earnings report and the main variables to watch in order to tell if the fourth-quarter data will ignite further upside potential or a potential correction.

Management expects a deceleration
Facebook delivered a truly explosive increase in revenue during the quarter ended in September; total sales jumped 59% to $3.2 billion, with 64%, or$2.96 billion, comingfrom advertising. Mobile advertising revenue accounted for 66% of total advertising revenue, a whopping increase from49% in the same quarter of2013.

Operating margin increased from 37% of revenue to 44%, so the company delivered both rapidly growing revenue and expanding profitability. However, investors did not like Facebook's guidance for the fourth quarter.

Management said it expected total generally accepted accounting principles expenses to grow between 45% and 50% for full-year 2014. This was an increase from a prior guidance for a cost increase in the range of 30% to 40%. According to the company, this would be primarily due to the WhatsApp acquisition's impact on stock-based compensation in the fourth quarter.

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Facebook also expects a sales increase between 40% and 47% in the fourth quarter. This would represent a remarkable financial performance for a business of its size, however, it would also be a considerable slowdown from previous quarters.

When analyzing sales data in the coming earnings release, investors might keep in mind that the fourth quarter of 2013 was the first holiday season to feature News Feed ads at full scale, so year-over-year comparisons in the holiday quarterare going to be much tougher than those in in the first three quarters of 2014.

What you need to watch
Wall Street analysts on average expect Facebook to report$3.78 billion in revenue for the quarter ended inDecember. This would represent an annual growth rate of 46.1% from the fourth quarter in 2013. Analysts expect $0.48 in earnings per share, a strong year-over-year increase of 78%.

A considerable part of revenue growth during the quarter should ideally come from mobile ads, which would indicate Facebook continues gaining strength in this crucial area. Also, it's important to monitor the mix between ad impressions and prices.

In the third quarter, ad prices increased 274% from the same quarter of 2013, while ad impressions declined 56%. This is a big positive for investors in Facebook stock, since the company is producing rapid revenue growth while at the same time reducing the number of ads. Placing too many ads can hurt the user experience, so it would be nice to see the company continued in this direction during the fourth quarter.

Users are another key variable to watch. As of the end of the third quarter, Facebook had 1.35 billion monthly active users, a 14% increase from the third quarter in 2013. Daily active users were 864 million on average for September 2014, an increase of 19% year-over-year.

User growth is clearly an important driver for Facebook, and monitoring the relationship between monthly and daily active users can be crucial when it comes to evaluating user engagement and interest in the platform.

Mobile is a major growth segment in the industry, so investors might want to keep a close eye on mobile user data. As of September, Facebook had 1.12 billion mobile monthly users and 703 million mobile daily users, increasing by 29% and 39% year over year, respectively.

Sales are outgrowing users lately, meaning average revenue per user is on the rise. The trend will most likely remain in place in the fourth quarter, indicating Facebook's ability to monetize each user is increasing.

In a nutshell, Facebook investors want to see a growing user base, higher engagement levels, and growing revenue per user, as this would prove the company continues consolidating its position as the leading social network in the world and creating the conditions for sustained growth in the years ahead.

The article Facebook Inc. Earnings Preview: Slowdown Coming or Sustained Growth Ahead? originally appeared on Fool.com.

Andrs Cardenal has no position in any stocks mentioned, but he is willing to consider a position in Facebook if the stock pulls back a bit. Andrs has a Facebookaccount, and he wont neither confirm nor deny that he has used thataccount during work hours.The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.