Solid Consensus Ahead of Facebook Earnings, but Eyes on Regulation

FB expected to report relatively strong Q3 earnings but analysts worry about growth slowdown.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Opening the social media app: Facebook earnings
5 min read
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Key Takeaways

  • Analysts see rise in revenue, earnings and monthly average users (MAU)

  • Company facing numerous probes by regulators at Federal, state and international levels 

When Facebook reports its Q3 earnings later this week, analysts say they have a laundry list of questions they’re hoping executives at one of the most powerful social-media sites can answer.

Facebook (FB) has been making headlines for some time now with the intense regulatory scrutiny on data privacy and antitrust issues as well as efforts to break up big tech that it and other social-media companies have been confronting.

FB continues to face probes by the Department of Justice, the Federal Trade Commission, the House’s Committee on Financial Services and now a gaggle of attorneys general from 47 states and U.S. territories, according to published reports. It disclosed the antitrust investigations underway by the FTC and the DOJ in its second-quarter earnings release.

Noise? What Noise?

For the most part, FB investors don’t appear to be paying much attention to the noise or even the hefty penalties that have been logged against it – in the last quarter FB took a second charge, this one at $2 billion, to cover the record $5 billion fine the FTC settled with it last summer. The stock has advanced 31% year-over-year, more than double the pace of the S&P 500. However, it’s been on a rocky road since Q2 results were released, ebbing and flowing toward a negative 8% return while the S&P 500 has been flat. See figure 1 below.

FIGURE 1: REGULATORY CLOUD? Shares of Facebook (FB – candlestick) have had a respectable 2019 but remain short of the July high. Meanwhile, the benchmark S&P 500 Index (SPX – purple line) has been inching toward a new all-time high in recent days. Data Source: S&P Dow Jones Indices, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Perhaps we shouldn’t overthink the current share price, though. Stocks go up and stocks go down, and what we’ve seen in this earnings season is that some stocks have been moving in the opposite direction of typical expectations, falling when earnings results and forecasts are good and moving up when they aren’t. It’s another reminder that past results don’t guarantee future performance, especially if company guidance nudges the other way.

As for FB’s results, many analysts say those that matter most to them are monthly active users (MAU) and average revenue per user (ARPU), two key metrics that have been on a forward climb for the past two years. However, the percentage gains have been falling ever so lightly and analysts said they will be keeping a close eye on those.

For example, MAU was up nearly 10% from Q3 2017 to Q3 2018 and what few forecasts for MAU are available, analysts expect about an 8% rise in MAU to 2.45 billion. It’s important to remember that the higher the MAU is, the harder it is to grow on a percentage-wise basis. Companies like Walmart (WMT), ExxonMobil (XOM) and Apple (AAPL) have those issues too. And, as one analyst said, FB’s No. 1 dominance in the social-media world can only grow by so much because there are only so many social-media users out there.

Analysts point to the growing popularity of Stories, the short-form and short-lived versions of user-generated photos and videos first introduced in 2017. From a revenue standpoint, FB believes this could be a winner with more than 1 billion daily active users and more than 3 million Stories ads across FB’s family of apps, the company said last summer. Analysts will be eyeing the fresh reading on those numbers.

The same can be said for WhatsApp and Instagram. It’s expected FB could report big gains in numbers for Stories on both those apps. The company also introduced automated ads for small businesses as well as dynamic ads on Instagram Stories and branded content ads on Instagram.

New Ideas for the News

And speaking of new ideas, the ink is hardly dry on these partnerships, but analysts say they’re looking forward to hearing more about FB’s move into curated news from an array of news outlets. Last week, it launched its News Tab, a test news service that will feature articles from major news publications as well as smaller ones.

FB is paying most of the media outlets through licensing fees, offering major news organizations like The New York Times and The Wall Street Journal millions of dollars in fees and six-digit fees to smaller publications. In all, it hopes to have as many as 200 publications provide news, though many won’t get paid at all, the company said.

This move could be an important one for FB, which has faced a boatload of allegations over the years that it has censored certain viewpoints and allowed so-called fake news to slip in.

FB has also been the bone of contention among publishers who complain it has usurped readership at larger and small publications without offering them anything in return through user shares. Pew Research, for example, estimates that 43% of adults in the U.S. get their news from FB. That means four in every 10 adults looks to the social-media site as a reliable source of news.

The site will be curated by both humans and FB’s algorithms, the company said. It hopes to roll out the News Tab beyond the 200,000 test group early next year. “People want and benefit from personalized experiences on Facebook, but we know there is reporting that transcends individual experience,” Campbell Brown, FB’s news partnerships vice president, said in a blog post. “We want to support both.”

That’s all fine and well, say analysts, and could go a long way toward cleaning up its brand image but what will it cost FB and how will it affect margins? Is there any revenue to be gained?

Let’s Start Talking about Innovation

 As we noted last quarter, FB is looking to turn the conversation away from putting out privacy and antitrust fires and back to innovation. Zuckerberg said as much again last week when he was defending the Libra cryptocurrency proposal before a sometimes intense grilling with the House’s financial committee.

He said if the U.S. isn’t aggressive in innovation, China will jump ahead. “We can’t sit here and assume that because America is today the leader that it will always get to be the leader if we don’t innovate,” he said.

But he also said he would drop the digital currency play he’s trying to make if the plan didn’t get permission first. “Facebook will not be part of launching the Libra payments system anywhere in the world until U.S. regulators approve,” he said during a sometimes intense grilling with the House’s financial committee.

Plus he admitted he didn’t know if Libra “was going to work,” calling it a “very complex” venture. “It’s a risky project and there’s been a lot of scrutiny” about it, he said.

Now analysts want to know what that all means and what the next steps might be. They also say they want to know more about these regulatory probes, especially in light of that last $5 billion ticket. Remember, though, that $5 billion isn’t even a month’s worth of FB’s revenues.

Facebook Earnings and Options Activity

FB is schedule to report after the market closes Wednesday. Overall, earnings expectations look pretty favorable: Third-party analysts forecast Q3 revenue of $17.3 billion, more than 26% higher than the year-ago period with per-share earnings estimated to reach $1.91, up more than 8% from the year-ago results.

The options market has priced in an expected share price move of 5.8% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Looking at the Nov. 1 expiration, call activity has been high, with concentrations at the 190, 195 and 200 strikes. Put volume has been lighter overall, with some activity at the 175 and 180 strikes. The implied volatility sits at the 42nd percentile as of Monday morning.

Good Trading,
JJ
@TDAJJKinahan

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Key Takeaways

  • Analysts see rise in revenue, earnings and monthly average users (MAU)

  • Company facing numerous probes by regulators at Federal, state and international levels 
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