What’s On Investors’ Minds? Facebook Q4 User, Ad Data As Tough Year Ends

Facebook wraps up a year dogged by controversy Wednesday as it reports Q4 earnings. User and ad data continue to be in the spotlight, along with what’s expected to be decelerating revenue growth.

5 min read

Looking back, 2018 is arguably a year Facebook (FB) might rather forget.

Highlights (or lowlights) for the social network company included top executives having to testify to legislators about mishandled data exposing millions of users, the hacking of nearly 50 million accounts, and the departure of several high-profile company leaders.

As controversy mounted around privacy and security, investors fled FB’s stock. It finished the year down about 40% from its July peak. At the same time, revenue growth has been decelerating.

Shares started 2019 with a nice little run (see figure 1 below), and now the company is scheduled to report earnings after the close Wednesday. For Q4, Facebook is expected to report adjusted earnings of $2.19 a share compared with $1.44 in the prior-year period, on revenue of $16.4 billion. Revenue is projected to be up 26.4% year over year, per analysts’ estimates.

Facebook told investors to expect 24% to 28% revenue gains in Q4, down from 33% revenue growth in Q3.

From a user perspective, Facebook reported having 2.27 billion monthly active users (MAUs) at the end of Q3, up 10% year over year, while daily active users averaged 1.49 billion in September, up 9%.

User data is likely to get a close look for signs of whether people are sticking with FB despite the controversy. User growth slowed in Q3, with both daily and monthly active users coming up a little short of third-party consensus estimates. Adding to the challenges, FB told investors to prepare for increased expenses in 2019. That has some analysts worried about FB’s bottom line.

Another consideration is the latest update on how many people are using FB’s family of applications, including Facebook, WhatsApp, Instagram, and Facebook Messenger. Also, Q4 earnings gives investors a chance to see whether advertising growth has continued during this controversial period.

Privacy and Security

Just last week, the company publicly pledged to crack down on scam ads with a new tool that will soon be available in the U.K. FB has been victimized by scam ads that often use images of celebrities without their permission to trick users with get-rich-quick schemes and other frauds, The Wall Street Journal reported.

In December, a trove of old documents released by the U.K. parliament gave an inside look at how Facebook shared user data. In response, FB Chairman and CEO Mark Zuckerberg acknowledged that “some developers built shady apps that abused people’s data,” but added that the company had taken measures to prevent that. Still, some analysts questioned company decision making on that and other issues.

Zuckerberg recently said the company has made strides addressing the concerns and expects to have a firmer grasp on user safety and harmful content, but added that FB won’t necessarily have these matters completely resolved until the end of the year.

Just last week, Zuckerberg wrote an op-ed piece for The Wall Street Journal explaining that FB doesn’t sell user data and doesn’t intentionally allow or leave “bad content” on the site.

“The only reason bad content remains is because the people and artificial-intelligence systems we use to review it are not perfect—not because we have an incentive to ignore it,” Zuckerberg wrote. “Our systems are still evolving and improving.”

Advertising and Platforms

Advertising is far and away Facebook’s largest business. In Q3, it reported ad revenue of $13.5 billion out of $13.7 billion in total revenue. Mobile ad revenue has been the driver of growth for some time and accounted $12.5 billion, or 92% of total ad revenue. That was up 40% year-over-year. The average price per ad was up 7% in Q3, down from 17% growth in Q2, and ad impressions increased 25%, according to the company.

Ad revenue rose 33% on a constant currency basis in Q3, so investors might want to check that figure for Q4 to see if there was any growth slowdown possibly related to the negative public relations FB faces.

In its Q3 earnings call, FB said it’s working to expand its advertising to platforms such as Messenger, Marketplace and Watch. Look for a possible update on progress there in Q4, because FB called expanding ads to these platforms “a big opportunity.”

FIGURE 1: UNFRIENDLY. The rough patch for shares of Facebook began 6 months ago, when the social media giant reported earnings that fell short of analyst expectations. But shares have risen about 20% from the Christmas Eve 2018 low. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Facebook Options Activity

Options traders have priced in a 5.9% ($8.64) stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim platform.

Put options have been active at the weekly 140 and 145 strikes, while call option activity has been heaviest at the 150 and 160 strikes. Implied volatility was at the 63rd percentile as of Tuesday morning. 

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.

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