Facebook's earnings will be released after the US market closes on Tuesday. Here are some thoughts.

Facebook has been on fire for the last week, clawing back all of its early October trading losses and breaking through $80.00 to a new all-time high. With the company’s earnings report coming Tuesday evening after US exchanges close, expectations appear to be running very high for quarterly earnings and upcoming guidance.

After some initial struggles after its IPO, Facebook has performed very well as a public company posting consistent growth in quarterly earnings both over the previous quarter and the same quarter a year earlier.

The company also has consistently delivered results well above street expectations. In the last five quarters Facebook’s earnings have beaten the street by 31% on average.

This time around, the street is actually expecting Facebook’s earnings to decline slightly to $0.40, which would be the first quarterly decline since March of 2013. This represents a growth rate of 60% over a year ago, which doesn’t appear to be a big stretch relative to the growth rates of 120% and 180% over year posted in the last two quarters.

Based on this, it appears that the street estimates are either conservative, or that the street expects growth to slow (which seems unlikely considering the record share price). Valuation also appears to be reasonable. Although the shares are trading at 44x street forecast earnings, strong forecast growth justifies this with the shares trading at a P/E to growth ratio of 1.2 times which is not excessive, particularly not for a tech stock.

Facebook earnings

QuarterEPS - AdjustedEPS - StreetEstimateEPS – vs. streetEPS – over quarterEPS – over year
Mar-12$0.09
Jun-12$0.1233.33%
Sep-12$0.120.00%
Dec-12$0.1741.67%
Mar-13$0.12(29.41%)33.33%
Jun-13$0.19$0.141.3658.33%58.33%
Sep-13$0.25$0.191.3231.58%108.33%
Dec-13$0.31$0.271.1524.00%82.35%
Mar-14$0.34$0.241.429.68%183.33%
Jun-14$0.42$0.321.3123.53%121.05%
Sept 2014 consensus$0.40(4.76%)60.00%
Dec 2014 consensus$0.4717.50%51.61%

Source: CMC Markets, Bloomberg L.P.

Facebook at $80.00P/ELong-term GrowthPEG
Trailing 12 month86.9337.4%2.32
Forecast 12 month44.6637.4%1.19

Source: CMC Markets, Bloomberg L.P.

Although Facebook’s shares appear to be reasonably valued and expectations don’t appear excessive, if for some reason, the company’s sales, earnings or guidance were to not meet expectations, the shares could be punished severely as we saw with the plunge in Netflix shares after its weak guidance last week.

In addition to the headline number, traders may focus on mobile revenue growth as usual, how the integration of the WhatsApp takeover is going and what new initiatives may be in the hopper. Any comments from the company on the potential impact the USD rally of the last few weeks may have had on its international earnings (which could now shrink when translated back to USD) could also impact the shares.

Facebook chart analysis

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Since a late winter correction ended in April, FB shares have been steadily advancing. Upward momentum slowed during the summer as shown by the negative RSI divergence. The shares ran into resistance near $80.00 last month and fell back along with broader markets but since completing a 38% retracement and retesting $70.00 support, the shares have been on fire, breaking out to a new high last week.

The RSI has broken out of a downtrend, indicating upward momentum is accelerating once again. A measured move from the recent correction suggests that if the shares could potentially trend toward $89.30 over time. Support has moved up toward $78.00.