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Factors Setting the Tone for Facebook's (FB) Q3 Earnings (revised)

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Facebook 's FB slowing user base growth rate, primarily due to increased concerns over data privacy, is expected to hurt third-quarter 2018 results, which the company is set to report on Oct 30.

The social giant has faced a lot of controversies in recent times. The company continued to face criticism globally for its data practices, following the Cambridge Analytica scandal that impacted almost 87 million users. The account hacking incident that impacted almost 30 million accounts tarnished Facebook's heightened security claims.

Further, aggressive investments on security would definitely hurt profitability in the to-be-reported quarter.

Facebook Provides Cautious Outlook

Facebook's second-quarter 2018 earnings of $1.74 per share and revenues of $13.23 billion lagged the Zacks Consensus Estimate of $1.75 and $13.40 billion, respectively. Moreover, monthly active users (MAUs) of 2.23 billion missed the consensus mark of 2.25 billion.

Facebook, Inc. Price and EPS Surprise

Facebook, Inc. Price and EPS Surprise | Facebook, Inc. Quote

Facebook provided cautious view for the second half of 2018. The company expects revenue growth rates to decline in the period. On a sequential basis, for both third and fourth quarter, revenue growth rates are expected to decline by high-single-digit percentages. Management also expects currency to be a headwind.

The Zacks Consensus Estimate for Facebook's earnings is pegged at $1.47, decreasing 7.6% year over year. The consensus mark for revenues of $13.83 billion represents an increase of 33.9% from the year-ago period.

Notably, Facebook has a solid record of earnings surprises in recent quarters, beating the Zacks Consensus Estimate in three of the trailing four quarters, the average positive surprise being 14.80%.

Growth Drivers Abound

Facebook has been benefiting immensely from the growing popularity of Stories across all its major platforms, with Instagram the taking center stage. Instagram and WhatsApp are the top two most popular Stories product in the world.

Instagram is Facebook's fastest growing division, based on its more than 1 billion monthly users and 500 million daily users. Further, 400 million people use Instagram Stories on a daily basis.

Currently, WhatsApp boasts a user base of more than 1.3 billion. Additionally, as confirmed at Facebook's F8 developer conference this May, WhatsApp Status has 450-million daily active users (DAUs) globally. Reportedly, WhatsApp business has a user base of more than 3 million.

Moreover, Facebook Messenger had 1.3-billion monthly active users (MAUs) as of the last reported quarter. Furthermore, the company recently announced that it has 300-million daily active users (DAU) of Stories on its main platform and Messenger, on a combined basis.

The company's focus on building and nurturing 'community' is a key catalyst. Instagram has significant growth opportunities, driven by rapid proliferation of Stories, Direct and IGTV.

Furthermore, Facebook's strategy of developing Stories to support ads is expected to drive growth. The company is also well poised to benefit from the growing demand for videos across its platform.

Moreover, the company's intent to secure the platform is commendable. Increasing infusion of artificial intelligence (AI) is expected to increase Facebook's ability to remove bad content quickly.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or #3 (Hold) has a good chance of beating estimates, if it also has a positive Earnings ESP . The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Facebook has a Zacks Rank #3 and an Earnings ESP of +0.17%. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Stocks to Consider

Here are few stocks you may consider as our proven model shows that these have the right combination of elements to post an earnings beat this quarter.

Himax Technologies, Inc. HIMX has an Earnings ESP of +11.11% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here .

HubSpot, Inc. HUBS has an Earnings ESP of +57.58% and a Zacks Rank #2.

Apple AAPL has an Earnings ESP of +1.06% and a Zacks Rank #2.

(NOTE: We are reissuing this article to correct a major error. The original version, published earlier today, October 24, 2018, should not be relied upon.)

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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