There never seems to be a middle ground on Facebook (NYSE:FB), as opinions run very hot or cold based on the latest data point (real or imagined) concerning the company. There's no question that Facebook surprised the Street with its mobile ad revenue growth this quarter, and user data seems to run counter to the worries that users are disengaging from Facebook. While I remain basically bullish on the company (and the stock), that comes with the warning that sell-side analysts are significantly jacking up their estimates in the wake of this quarter and any shortfall in the third quarter will be swiftly and brutally punished.

Ad Revenue Breaks Out
Facebook not only beat estimates for the second quarter, it pretty much stomped them. Revenue rose 53% from last year and 24% from the prior quarter, beating the average expectation by more than 10%. Although payments revenue was soft (up 11% and flat, respectively), ad revenue jumped 61% and 28% on a 76% sequential improvement in mobile revenue. Unlike Google (Nasdaq:GOOG) and Yahoo! (Nasdaq:YHOO), Facebook saw significant ad price growth, with pricing up 13% overall and up 40% in North America. 

Sell-side analysts have pretty much gone giddy with the revenue and user data from Facebook's second quarter, but the profit development wasn't bad either. Gross margin was up more than five points, while non-GAAP operating income rose 54%, though operating margin improved only modestly.

SEE: 4 Companies Behind The Social Media Curtain

Keeping Users, And Monetizing Them, Seems To Be Going Well
One of the continuous points of concern about Facebook is the level of user engagement and satisfaction. Plenty has been written about how younger users are not as interested in Facebook and that rival social media platforms like Twitter and Google+ are gaining as a result. In spite of that, Facebook's active user count continues to grow (up 21% and 4%), and the ratio of daily users to monthly users improved to 61%. At the same time, average revenue per user improved 26% and 19%, so it seems as though Facebook is not having as much trouble as feared in keeping and monetizing its users.

Given the sheer size of Facebook, I'm not sure how much or how quickly the platform can grow at this point. Even so, opportunities like video ads (coming this summer) and adding video to Instagram should keep the revenue rolling in. What's more, the Graph Search concept is still pretty young and could yet prove to be a valuable additional platform for ads.

At the same time, it seems like the company has done a good job of fencing in the risk from the Zynga (Nasdaq:ZNGA) relationship. Elsewhere, companies like LinkedIn (Nasdaq: LNKD) and Angie's List (Nasdaq: ANGI) seem to be trying to run pages from Facebook's playbook, but not to the same effect so far.

SEE: The Power Of Social Media: Influencing Trading And The Markets

The Bottom Line
Facebook is going to get plenty of well-deserved praise for the big leap forward the company made this quarter with its mobile ad revenue efforts. At the risk of sounding like a curmudgeon, I'm a little concerned that analysts are going overboard with adjusting their models and taking this result as the “new normal”. It's not that I don't believe Facebook can get there, rather it's just that I won't be surprised if there is some volatility/inconsistency at some point in the next few quarters, and I expect that the shares will react sharply to it.
Barring a sharp reversal in the progress seen this quarter, I think Facebook shares are likely to still be undervalued even after the big expected pop today. With fair value in the mid-to-high $30s, there's still room for the shares to go, though the volatility here may make this a tough stock for some investors to hold.

Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Stock Analysis

    The Biggest Risks of Investing in Facebook Stock

    Find out what risks Facebook shareholders face in coming years, and why the social media giant may struggle to find new markets in the future.
  2. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  3. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  4. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  5. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  6. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  7. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  8. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  9. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  10. Stock Analysis

    Top 4 Companies Owned by Yahoo

    Understand Yahoo's acquisition strategies and how the company has been able to make so many acquisitions. Learn about the top companies owned by Yahoo.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!