Last year was a rough one for investors in the largest Internet companies. Shares of Google (GOOGL) (GOOG), Amazon.com (AMZN) and Netflix (NFLX) all moved lower in 2014. One of the few winners among the dot-com leaders was Facebook (FB). The top dog among social networking websites saw its stock soar 43 percent last year, easily beating the market.
Its ability to keep moving higher in 2015 will be put to the test on Wednesday afternoon when Facebook reports quarterly results. There are a few reasons to be optimistic at a time when the company's lofty valuation finds it with plenty to prove. Let's go over a few of the things that could go right for Facebook.
1. Monetization Continues to Improve
With Facebook armed with 1.35 billion active monthly users as of the end of September, the market accepts that user growth is slowing. A majority of the Web-tethered world knows all about Facebook. The real growth will come from getting existing users to spend more time on the site -- and, more important, Facebook's ability to milk more revenue out of every visit.
%VIRTUAL-WSSCourseInline-561%We're already seeing that happen. Revenue and adjusted earnings climbed 59 percent and 73 percent, respectively, in the third quarter compared to the same period a year earlier. This kind of heady growth was possible despite a mere 14 percent year-over-year uptick in monthly active users, because folks are spending more time on Facebook and the company is doing a better job of monetizing its traffic.
It's a trend that should continue as advertisers keep paying more to reach Facebook's mobile audience.
2. History Is on Facebook's Side
Expectations are high for Facebook's financial results. Analysts see revenue climbing 46 percent with earnings growing at an even faster 55 percent rate. These are some pretty big shoes to fill for a company that's already ringing up $12 billion a year in revenue, but Facebook has historically been up to the task.
Let's go over how Facebook held up during the past four quarters.
Earnings per share estimate
Fourth quarter 2013
First quarter 2014
Second quarter 2014
Third quarter 2014
Source: Thomson Reuters.
This is the kind of momentum that bodes well heading into Wednesday afternoon. Wall Street's holding out for a profit of 48 cents share, but the trend suggests that Facebook should find a way to once again deliver an upside surprise on the bottom line.
3. It's Time to Set the Stage for 2015
A blowout quarter isn't enough to send a stock higher. In fact, shares of Facebook slipped three months ago after an otherwise solid financial showing. With Facebook already commanding a market cap of roughly $215 billion, it needs to make sure that it paints a rosy picture of the future. When a stock is priced for perfection, the best way for it to move higher is to prove that it can exceed perceived perfection.
Facebook can do that. The social networking website can make big waves in 2015 if it's able to roll out lucrative video ads, get more companies to pay up for a premium presence and find a way to more effectively cash in on Instagram's booming traffic.
Yes, Facebook owns Instagram. It may also own more companies by the end of this year. It closed out the third quarter with $14.25 billion in cash and marketable securities. There will be opportunities for Facebook to put that money to work in 2015 to buy fast-growing companies that can grow even faster with Facebook's resources. Obviously, Facebook isn't going to reveal any future deals, but if it talks up the potential of more needle-moving acquisitions, you can be sure that it's negotiating in earnest. This could be another big year for Facebook investors, but Facebook itself will have to make sure that it inspires the necessary confidence.
Motley Fool contributor Rick Munarriz owns shares of Netflix. The Motley Fool recommends and owns shares of Amazon.com, Facebook, Google (A and C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.