Earnings season hits its stride this week with a number of tech platforms expected to report. First up is the social media space, as Twitter and Facebook are expected to release earnings Tuesday and Wednesday, respectively.
We’re approaching earnings season crunch time, with many of the top names in social media, cloud services, semiconductors and other technology giants opening their books over the next week or so.
Social media takes center stage Tuesday morning when Twitter (TWTR) releases its Q1 numbers, and it returns to the spotlight Wednesday when Facebook (FB) reports after the close. Here’s a quick snapshot.
When Twitter (TWTR), one of the most prominent social media platforms on the planet, reports Q1 earnings ahead of the bell Tuesday, many analysts say they will be focused on topline growth.
That’s likely because some analysts have described TWTR’s revenue growth in recent quarters as nothing short of amazing after a disappointingly dismal 2017. Remember Q4’s 24% year-over-year gain, which management said reflected “better-than-expected performance across most products and geographies” and was helped by an advertising revenue boost of 25% on a constant currency basis? One question might be whether that momentum continued into Q1.
The company’s guidance for Q1 then was revenue growth in a range of 8% to 17% on a year-over-year basis. That appeared to disappoint investors, who saw the guidance as soft and pushed the stock down nearly 10% after earnings were announced. The stock has since recovered those losses, but hasn’t advanced much beyond that point. (See figure 1 below).
Some analysts expect Q1’s revenue numbers to ring up on the high end of that guidance. But investors should never consider that gospel—past performance is no guarantee of future success.
Analysts, on average, are projecting earnings of $0.15 per share on revenue of $774 million. If that happens, it would represent a one-cent decline in earnings versus the same quarter last year, but a 16.5% jump in revenues. Margin pressure is likely to come from costs tied to, as Chief Executive Jack Dorsey has prioritized, “improving the health of the public conversation on TWTR.”
But there’s far more to TWTR’s performance than revenue gains—though investors typically like to see that.
Also consider watching for the latest figures on TWTR’s daily active users, or DAU—a metric it introduced in Q4 to help put TWTR’s progress into better perspective.
TWTR replaced the monthly average user (MAU) last quarter with DAU because it believes those numbers, which measure how often users are opening the app every day, are easier to digest and better reflect user activity and growth.
But back to Dorsey’s stated focus: Investors are likely to want to know about those measures he started tweeting about last summer. Among other things, he has said he wants to curtail what’s called “dunking” on TWTR. In its best form, it’s a conversation builder of many people taking one tweet and responding to it with their own opinions. As one TWTR follower said about dunking, TWTR “magnifies and rewards strong emotions.”
That led Dorsey last summer to turn his focus to bettering TWTR’s public conversation, according to Q4’s shareholder letter, amid backlash from subscribers and advertisers. His aim is to cut the abuse and sometimes vile and nasty attacks that many dunkfests create.
While there is still much progress to be made, TWTR has been cracking down on dubious accounts. The result was a 9 million decline in year-over-year MAU and a 5 million pullback from Q3, the company said in Q4. That’s part of what prompted TWTR to create DAU, which has been growing as daily users pick up their participation on the app.
Some analysts believe that rooting out harmful accounts will up the usage on the platform, which might in turn feed the advertising platform kitty. Stay tuned.
Options traders have priced in a 9.5% ($3.27) 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 34 and 35 strikes, while call option activity has been heaviest at the 35 strike. Implied volatility was at the 42nd percentile as of this 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.
Despite the barrage of controversy surrounding Facebook’s (FB) user privacy issues and potential ties to interference in U.S. elections, the stock has still performed strongly in Q1, trading well off its December lows to climb nearly 44%. (See figure 2 below).
That kind of stock jump tends to put pressure on performance as investors look for it to continue. As earnings day approaches this Wednesday after the market closes, FB’s revenue gains are likely to interest many, considering that they have mostly slowed in recent quarters from the mid-to high-40% gains to a 30% year-over-year increase in Q4 2018.
Management’s forecast for Q1 is an increase of between 24% to 26% from a year ago.
Analysts say they’ll be watching for margin erosion tied to higher costs. Tightening security around user privacy, for example, looks like it might have come at a steep price tag. We’ve seen some meaningful declines in operating margins in recent quarters. In Q4, for example, expenses surged 61% to $9.1 billion, with management pointing to “continued investment in infrastructure, safety and security, and innovation.”
Facebook told investors then to prepare for another year of extreme expense spending, forecasting a 40% to 50% jump in 2019.
Analysts expect FB’s revenue to leap some 25% to $14.97 billion but earnings are projected to decline by about 3% to $1.63 per share. That, however, is better than expectations in January, which stood at $1.56 per share. As noted, the trigger for the decline appears to be higher costs.
But remember, too, that FB has historically sandbagged guidance, meaning it has set the bar low and then has slammed past it—like it’s done for eight straight quarters. A few quarters ago, it even warned that higher spending could cloud the numbers, but they still came out shimmering.
Investors are also likely to check on FB’s user growth across its entire social network family, which includes Facebook, Instagram, Messenger and WhatsApp. A year ago, FB said that 2.7 billion users touched at least one of its apps in December. Two billion were active daily.
The conference call after the report could be a weighty one, considering all the headlines around FB in recent months and the overhang of regulatory concerns.
What, for example, might FB see in the way of future regulation? CEO Mark Zuckerberg, in an opinion piece he penned for the Washington Post late last month, all but begged lawmakers to build a regulatory fence around the Internet.
“Lawmakers often tell me we have too much power over speech, and frankly I agree,” he wrote. “I’ve come to believe that we shouldn’t make so many important decisions about speech on our own.”
To that end, he asked lawmakers to take a “more active role” in standardizing Internet regulations related to harmful content, election integrity, privacy and data portability.
“I believe we need a more active role for governments and regulators,” he said. “By updating the rules for the Internet, we can preserve what’s best about it—the freedom for people to express themselves and for entrepreneurs to build new things—while also protecting society from broader harms.”
Updating the Internet’s rules of the road won’t be cheap, according to many analyst expectations. How might FB see that impacting margins?
Given that many analysts are projecting revenues to jump by double digits—advertisers don’t appear to be backing off of FB despite these regulatory threats—they will likely be looking for some guidance. Recall that Q4 saw signs of a possible ad performance headwind.
Considering, too, that FB upped the ad load on Instagram in the quarter—one analyst called the increase “dramatic”—and FB Stories has appeared to have gained some traction in Q1, some analysts are calculating another outperformance this quarter. And that’s a wait-and-see moment.
Options traders have priced in a 5.4% ($9.72) stock move in either direction around the coming earnings release, according to the Market Maker Move indicator.
Put options have been heaviest at the weekly 160, 167.5 and 170 strikes. Call options have been active at the 180 and 185 strikes, but the most active strike of all has been the 190 strike. Implied volatility was at the 46th percentile as of this morning.
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