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Why Facebook’s Stock Price Fell after Its 1Q17 Earnings

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How Facebook stock has fared

On May 4, 2017, Facebook (FB) stock returned 6.7% in the trailing one-month period and a decent 29.2% on a trailing one-year basis. Facebook released its 1Q17 earnings on May 3, 2017. Its stock price fell 3.0% after its earnings release despite decent numbers.

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Could Facebook’s revenue growth decline?

In 1Q17, Facebook (FB) reported revenues of ~$8.0 billion, which is higher than the consensus estimate of ~$7.8 billion. Its 1Q17 revenues rose 49% year-over-year (or YoY), driven by robust growth in its advertising revenues. It posted earnings per share (or EPS) of $1.04, up 76% YoY.

However, its revenues fell in 1Q17 compared to 4Q16. The company has historically had a poor first quarter while the fourth quarter is its best, as the graph above shows.

Facebook’s ad revenues are seeing solid growth. However, the company is reaching its limit on ad load, which is the volume of ads the company can show users. This could cause revenues to decline going forward. 

Increasing ad loads, increasing time spent, and user growth have been the main drivers of Facebook’s revenue growth. With its ad loads likely to slow down, the company may have to depend on the other two factors to make up the difference in revenues.

Facebook’s user growth continues to impress, as we mentioned above. Its total monthly active users grew 17% YoY to ~1.9 billion people. Meanwhile, Messenger, Whatsapp, and Instagram, all owned by Facebook, have also seen an increase in active users.

What the Wall Street analysts say

Facebook’s revenue growth is expected to slow to 26% in 2018 from 38% in 2017, according to the latest estimates from Wall Street analysts.

Of the 46 analysts covering Facebook (FB), a whopping 42 recommend a “buy,” one recommends a “sell,” and three recommend a “hold.” The average stock price target is $164.03, with a median target of $165.00 on May 4, 2017. FB is trading at discount of 10.3% to median analyst estimates.

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