Facebook Sitting at 52-Week Lows Ahead of Tomorrow’s Earnings Report

Social media company Facebook reports earnings after market close on Tuesday, October 30. Here’s a look at what might be expected from its third-quarter report.

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It’s been a tough stretch for Facebook (FB) since it reported earnings at the end of July. In that time, the stock went from an all-time high of $218.62 to $143.80, flipping from a 20% year-to-date return to about a 20% decline. 

FB’s next earnings report is coming up after market close on Tuesday, Oct. 30.  One area that analysts and investors are likely bracing for is a deceleration in the company’s revenue growth rate, which CFO David Wehner said would continue to happen in the second half of the year, after it slowed by 7% in Q2. 

For Q3, FB is expected to report adjusted EPS of $1.47, down from $1.59 in the prior-year period, on revenue of $13.78 billion. Revenue is projected to increase 33.4% year over year, per analysts’ estimates, slowing from the 42% growth the company reported in Q2. 

Advertising and Platforms

Advertising is far and away FB’s largest business. In Q2, it reported ad revenue of $13 billion out of $13.2 billion in total revenue. Mobile ad revenue has been the driver of growth for some time and accounted for $11.9 billion of total ad revenue. The average price per ad was up 17% in Q2 and ad impressions increased 21%, according to the company.

In recent quarters, the company has taken steps to expand ad offerings across its platform. COO Sheryl Sandberg said FB was “making it easier to run ads on Instagram and in Stories” on last quarter’s call, and highlighted the addition of shopping features to Instagram. 

From a user perspective, FB reported having 2.23 billion monthly active users (MAUs) at the end of Q2, while daily active users averaged 1.47 billion in June. Analyst consensus is expecting 2.29 billion MAUs for Q2. 

Privacy and Security 

Privacy and security concerns are likely to come up on tomorrow’s earnings call. On September 28, FB provided additional details about a new security issue that affected 50 million accounts, after the company has already had several other incidents this year. CEO Mark Zuckerberg and other top executives have been appearing before Congress with greater frequency this year, to provide details about their business, these events, and how they’re responding to them.  

The concerns that analysts have about these security breaches, and the scrutiny that it brings, are twofold. First, analysts are often concerned user growth could be impacted by people that choose to delete their account, or by people who choose to not sign up. The second concern is that advertisers could decide to spend less on that platform, or they could decide to not advertise at all. 

Wave of Departures

Several high-profile executives, including Instagram co-founders Kevin Systrom and Mike Krieger, as well as Oculus co-founder Brendan Iribe, have departed FB recently. FB already announced that Instagram would be headed by Adam Mosseri, a long-time Facebook executive, but several analysts have expressed concerns about the string of departures so they might be looking for some clarity around the transition of responsibilities to new managers. 

Most would probably argue Oculus is much less important than Instagram. Sales of the virtual-reality hardware is lumped into payments and other fees, which generated $193 million in Q2 2018. 

Stuck in a Downtrend? FB has been trending downward since its last earnings report. Shares closed at $145.37 on Friday and are sitting at the $145 level, which has been a level of support since mid-2017. Chart source: thinkorswim® by TD Ameritrade. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Facebook Options Activity

Around FB’s upcoming earnings release, options traders have priced in a 7.3% stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. Implied volatility was at the 100th percentile as of this morning. 

In short-term options trading at the Nov. 2 weekly expiration, there has been a lot of activity across a range of strikes on the call side, with heavier volumes between the 150 and 160 strikes. On the put side, trading has been all over the place and there haven’t been any strikes where trading has stood out. 

Looking at the Nov. 16 monthly expiration coming up in a few weeks, calls have been active at the 150 and 155 strike prices, while puts have been concentrated at the 140 and 145 strikes. There is also a sizable amount of open interest on the put side at the 155 and 160 strikes, both of which had over 30,000 contracts open at Monday’s open. 

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,

JJ

@TDAJJKinahan

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