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Earnings Preview: Tech Giant Facebook Reports on Wednesday

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July 25, 2017
People in a circle on their cell phones
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Social network Facebook (FB) reports second-quarter earnings on July 26 after market close. This earnings report comes out a month after the company announced at the end of June that its flagship platform had hit 2 billion monthly active users.

When the company reported first-quarter results, the number of monthly active users stood at 1.94 billion and had grown 17% year-over-year. That growth had largely been fueled by markets outside of the U.S. and Canada. Since hitting a billion monthly active users five years ago, the company has added 746 million users in Asia and the Rest of World region, according to TechCrunch.

Despite the growing number of users, management has warned against slowing ad revenue growth rates. At the end of the first quarter, Facebook CFO David Wehner said that management expects “ad revenue growth rates will come down meaningfully over the course of 2017.” He also said they expect “ad loads will play a less significant factor in driving revenue growth after mid-2017.” Like the name implies, ad loads are the number of advertisements that a company can load in users feeds, and Facebook has cited increasing ad load as a primary source of revenue growth for the company in past quarters.

As management has said it believes ad load on its flagship platform is reaching its max, many analysts have turned to the company’s other properties. According to CFRA analysts, some of the platforms with increased monetization potential are Instagram, and the company’s messaging platforms Messenger  and WhatsApp, which both have roughly 1.2 billion monthly active users according to company figures.

According to Recode, in order to help monetize some of those platforms, Facebook  launched ads on Messenger this year, increased its advertising on Instagram, and has been testing ads in its Marketplace. The Wall Street Journal also recently reported that the company is in talks with Hollywood studios about producing its own TV shows, with the goal of allowing the company to sell more video advertising.

Out of the company’s platforms, Instagram is one that has been a primary focus among analysts after Snap’s (SNAP) IPO. In the past several quarters, Facebook has continued to roll out new features on its platform that are similar to ones available on the Snapchat app. 

Facebook (FB) stock ytd performance up to earnings charted on thinkorswim platform

FIGURE 1: NEW ALL-TIME HIGHS.

Ahead of Q2 earnings, Facebook (FB) stock just hit a new all-time high of $166.17 on July 24. So far this year, the stock is up 42.05% compared to the S&P 500’s (SPX) 9.39% increase. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Facebook Earnings and Trading Activity

For the second quarter, Facebook is expected to report earnings of $1.13 per share, up 16.5% from Q2 2016, on revenue of $9.17 billion, according to third-party consensus analyst estimates. Revenue growth is expected to outpace earnings growth with projections for a 42.5% year-over-year increase.  

So far this year, the stock has continued to climb and hit a new all-time high of $166.17 in trading on July 24. With the recent July rally in the stock, it is up 42% year-to-date. With the company’s upcoming earnings release, options traders have priced in around a 4.1% potential share price move, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading leading up to the earnings release at the July 28 expiration, calls have been active at the 170 and 177.5 strike prices, while puts have been active at the 157.5 and 165 strikes. As of this morning, the implied volatility sits at the 83rd percentile. 

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.

Looking Ahead

More social networks are releasing results this week, with Twitter (TWTR) set to report Q2 earnings before market open on July 27. That same day, retail and tech giant Amazon (AMZN) will open its books after market close.

Good Trading,
JJ
@TDAJJKinahan

NC
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