Facebook, Inc. Earnings: Will Growth Slow?

By Markets Fool.com

When Facebook (NASDAQ: FB) reports third-quarter results on Wednesday, November 2, investors will be watching intently. With the stock up about 10% since Facebook reported jaw-dropping second-quarter growth, and with the stock hitting all-time highs, investor expectations for this growth stock are undoubtedly high. Can Facebook deliver?

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Facebook CEO Mark Zuckerberg (right) in his office. Image source: Facebook.

Ahead of Facebook's third-quarter earnings release, here's a look at some key areas to watch.

Revenue growth

Since Facebook's revenue has been growing at rapid and accelerating rates in recent quarters, investors will likely be watching revenue growth closely when third-quarter financial results are posted.

For a reference point, here's a look at Facebook revenue growth in the last two quarters, as well as the growth implied by the consensus analyst estimate for Facebook's third-quarter revenue.

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Metric

Q3 2016 Growth Forecast

Q2 2016 Growth

Q1 2016 Growth

Revenue

54%

59%

52%

Data for quarterly revenue growth retrieved from Facebook press releases for quarters shown. Forecast is consensus analyst estimate provided by Thomson Reuters. Table source: Author.

Investors shouldn't expect Facebook's revenue growth in its third quarter to be as high as the 59% it achieved last quarter. Facebook CFO David Wehner warned investors in the company's most recent earnings call that revenue growth will likely decelerate in the second half of the year as Facebook goes up against tougher comparable growth in the year-ago quarters.

User growth

It's difficult to overstate the importance of users to Facebook's business since it'sa social network. Not only is the company's core native Facebook platform driven by its active users, but so are the company's younger social products, including Messenger, WhatsApp, and Instagram. With this in mind, investors should look for continued growth in all of these platforms.

Messenger. Image source: Facebook.

When Facebook reported second-quarter results, monthly active users on Facebook hit 1.71 billion and were up 15% year over year and 3.5% sequentially. Investors should look for similar growth in this important metric in the company's third quarter.

WhatsApp and Messenger both had over 1 billion monthly active users in Facebook's second quarter. And Instagram's monthly active users were above 500 million. While Facebook doesn't provide detailed data on these platforms' user trends, management may at least indicate whether or not the platforms are growing.

Engagement

Another key metric for Facebook investors to watch is the company's engagement rate, or daily active users as a percentage of monthly active users.

Facebook's engagement rate is extraordinarily high. In the company's most recent quarter, for instance, a whopping 66% of monthly active users were using the service every single day. Not only is this a record high engagement rate for Facebook, but it's up from 65% in the first quarter of 2016 and from 63% two years ago. Clearly, Facebook is doing an excellent job at facilitating engagement.

Investors should look for Facebook's engagement rate to at least stay at current levels. If it pulls back, investors may want to look for an explanation from management to see what might have caused the pullback.

Facebook will release its third-quarter earnings release shortly after the market closes on Nov. 2. On the same day, investors can tune into management's live conference call, which will be available at the company's investors relations website at 2:00 p.m. PST, to listen to management discuss the quarter's results.

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Daniel Sparks owns shares of Facebook. The Motley Fool owns shares of and recommends 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.