North America

Earnings Preview: Facebook Q3 2018 (FB)

By: Craig Bowles

Overview

Facebook, Inc. (FB) is slated to report 3Q 2018 earnings after the bell on Tuesday, October 30th. The actual results are expected to come through at approximately 4:05 p.m. ET with a conference call to follow at 5:00 p.m. available at Facebook Investor Relations.  The social networking company is a component of the S&P 500 and NASDAQ 100. Shareholders approved a 3-for-1 split for Facebook stock split on June 20, 2016 but that proposal was withdrawn in favor of issuing a new class of non-voting shares.

Outliers & Strategy

Key measures:

  • Non-GAAP Earnings Per Share (EPS): Analysts expect $1.47 (range $1.17 to $1.96). (Source: Yahoo! Finance) Consensus was $1.51 three months ago.
  • Revenues: Analysts expect an increase of 33.4% y/y to $13.78 bln (range $12.25 bln to $14.25 bln).
  • Monthly Active Users: Four qtr average growth of 13.6% y/y would be 2.352 bln but growth has slowed the last five quarters in a row.
  • Daily Active Users: Four qtr average growth of 13.6% y/y would be 1.557 bln but growth has slowed the last six quarters in a row.
  • Facebook’s P/E is 22.5; P/B 5.3; P/S 8.8; P/CF 15.3. Given slower expectations for revenue growth, a Price/Sales would have to get down to 5 to become attractive for value investors.
  • Analysts view of Facebook with 41 Buy, 5 Hold, and 2 Sell ratings. (source: MarketBeat.com)
  • Insiders sold a net 1,913,568 shares in the last three months but bought a net 833,055 shares in the past year. (source: NASDAQ.com)
  • Facebook shares have a 1-day average price change on earnings of 5.55%. Options are pricing in an implied move of 9.11%.

Recent News

  • 10/29: Bank of America expects Facebook management to remain cautious after some ad buyers expressed concern about Facebook’s ad sales, which account for 98% of its total revenue, according to a post at Barron’s.com.
  • 10/03: Facebook faces $1.6 billion fine as top EU regulator officially opens probe into data breach, according to a post at CNBC.com.
  • 10/03: Three in four Facebook users say they’ll take action over the latest hack, according to a post at businessinsider.com.
  • 9/18: JP Morgan reduced its Facebook 2019 earnings per share estimate to $7.40 from $7.89 citing higher expense spending. The company previously warned of lower future margins due to increased security and content review expenses, according to a post at CNBC.com.
  • 9/12: Facebook could be affected by the EU’s new copyright directive, according to a post at CNBC.com.
  • 9/10: Facebook animal trade exposed in Thailand, according to a post on bbc.co.uk.
  • 9/06: Facebook to invest $1 billion in first Asian data center in Singapore, according to a post on Reuters.com.
  • 9/05: More than 1 in 4 Americans have deleted the Facebook app in the past year, according to a new survey, according to a post on Businessinsider.com.
  • 8/29: Facebook’s Watch video-streaming service is rolling out worldwide, just over a year after its US launch, according to a post on BBC.com.
  • 8/27: German antitrust watchdog plans action on Facebook this year (not monetary as with EU), according to Reuters.com.
  • 8/22: Piper Jaffray maintained an Overweight rating on Facebook citing that users ‘don’t seem to care’ about data scandal, fake news, according to a post on CNBC.com.
  • 8/13: RBC Capital Markets suggests investors overreacted after Facebook missed estimates on daily active users and warned on forward guidance which has made the stock the ‘most appealing risk-reward’ stock in tech. Upcoming monetization of Whatsapp and Facebook Messenger opens up a huge opportunity for profit, according to a post on CNBC.com.
  • 8/07: Facebook has denied reports that it is actively asking banks for details of users’ financial transactions, according to a post on BBC.com.

Summary

Facebook got hacked and 50 million accounts were compromised. Facebook reset the accounts of another 40 million users as a “precautionary step.” Facebook’s stock has struggled since the last earnings release but could rally back into the $180-190 area to make a head-and-shoulders topping formation. European regulations limited what Facebook could do with user data and now a new copyright directive may produce another issue. Analyst bullishness remains impressive despite their slowing growth expectations. Instagram, Messenger, and Facebook Watch are expected to drive Facebook’s next growth spurt. Advertising revenue growth is still over 40% but slowed from 50% in Q1. The lack of teen interest is similar as with Twitter and that continues to be a worry. Insider selling spiked the last three months which is always a worry amid weakness but the stock came off all-time highs. The company has beaten and missed estimates by an average of 4c the past four quarters. Estimize consensus for Non-GAAP EPS of $1.55 on revenue of $13.927 bln compares to analyst consensus of $1.47 on revenue of $13.78 bln. Traders also focus on the “user” data which has shown slower growth the past year.

 

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