Ahead of the Tape: Facebook Rally Too Much of a Good Thing -- WSJ

By Steven Russolillo 

Facebook Inc. is firing on all cylinders, but even fine-tuned machines make pit stops.

The social-networking giant's past two quarterly reports were nearly as close to perfection as possible. Facebook is earning more money from each one of its 1.6 billion users, a base that is still growing at a healthy clip. It has become a mobile-advertising powerhouse, with video being the latest growth area. And its stock's annualized appreciation of more than 30% from its initial public offering has pushed it to records.

Already one of America's most valuable companies at nearly $350 billion, it would reach the $1 trillion mark at its current pace by 2020.

Its rapid ascent so far is unmatched by other tech behemoths. After a little more than four years on the public markets, its market value is already approaching a level that took Google parent Alphabet Inc. nine years and Cisco Systems Inc. 10 years from their respective IPOs to achieve. Microsoft Corp. did it in 13 years. Amazon.com Inc. reached it in 18 years. Apple Inc. needed over three decades.

Just how much longer can Facebook keep rallying in this nearly unabated fashion? Wednesday's earnings report might be just the catalyst for shares to take a breather.

For one, the bar is set incredibly high. Even the slightest of missteps could be punished. Analysts estimate adjusted second-quarter earnings rose 62% to 81 cents a share. That same estimate was 61 cents a year ago. Revenue is anticipated to have risen by 49% to $6.01 billion.

Wall Street analysts, usually an upbeat bunch, are particularly optimistic. Only one of the 49 brokers that cover the social network has a "sell" recommendation on it, according to FactSet. That unanimity is unsettling.

More competition could ultimately be the thing that dents Facebook's earnings. Snapchat's rising popularity among both young and older users is the latest concern. Snapchat could prompt users to spend less time and activity on Facebook's properties, such as Instagram. Analysts at Jefferies project Snapchat could eventually deny Instagram as much as $150 million in advertising spending.

Minus a stumble immediately following its IPO, Facebook's ascent has been phenomenal. This all just might be too much to like.

(END) Dow Jones Newswires

July 27, 2016 02:47 ET (06:47 GMT)

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