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Facebook (FB) to Maintain its Stellar Earnings Streak in Q1?

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Facebook FB is set to report its first-quarter 2018 results on Apr 25. The company remained in the spotlight throughout the quarter for a number of reasons and its results are thus highly awaited.

In mid-March, when the company’s data misuse allegations surfaced, it captured the attention of worldwide regulators instantaneously. The incident wreaked havoc not only on the stock but also on the technology sector, bringing the entire sector down in the last few days of the quarter.

However, Facebook’s undying efforts to regain its brand image and trustworthiness coupled with CEO Mark Zuckerberg’s impressive testimony in front of the Congress restored investors’ confidence, leading to a revival in shares after three weeks of turmoil.

Notably, shares of Facebook have gained 16.9% in the past year, significantly outperforming the industry’s 7.4% rally.

Nonetheless, since the data fiasco surfaced toward the end of the quarter, it is unlikely to have a major impact on the company’s upcoming results.

Let’s see how things are shaping up for the announcement.

Earnings Trend Impressive

The social media giant has a solid record of earning surprises in recent quarters, beating the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 15.78%.

The company’s fourth-quarter 2017 earnings of $2.20 per share and revenues of $12.97 billion crushed the Zacks Consensus Estimate of $1.96 and $12.58 billion, respectively.

For the first quarter of 2018, the Zacks Consensus Estimate for Facebook’s earnings per share and total revenues are pegged at $1.36 and $11.46 billion, respectively, representing an increase of 30.8% and 42.7% from the year-ago period.

Things to Watch Out for This Time

Facebook’s strength in online and mobile advertising revenues, coupled with expanding Instagram user base, is likely to drive revenue and earnings growth in the soon-to-be-reported quarter.

Facebook’s mobile ad business has fast emerged as a major contributor to its advertising revenues. Mobile monetization has increased with higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads.

Notably, in the fourth quarter, Mobile ad revenues surged 57% year over year to $11.4 billion, contributing 89% to total ad revenues.  Mobile-first video constituted 50% of the company’s video ad revenues in the quarter compared with 41% last quarter.

Facebook’s huge user base of over 2.13 billion combined with Instagram’s strong user base of more than 800 million makes it highly attractive to advertisers. Instagram has more than 2 million active advertisers. The Instagram Stories platform, which was opened to global advertisers in March 2017, is also gaining traction.

The Zacks Consensus Estimate for advertising revenues stands at $11.23 billion, nearly 43% more than the year-ago quarter figure.

Facebook, Inc. Price and EPS Surprise

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

New Features to Boost User Base

After Instagram, investors will be looking at the company’s detailed monetization efforts for Messenger and WhatsApp. The launch of a plug-in for Messenger meant to ease communication between businesses and consumers is a positive. In January, Facebook launched WhatsApp Business — a new app designed to facilitate communication between small and medium businesses and customers.

Moreover, in an attempt to expand its user base, Facebook launched Facebook Lite application in more countries including developed nations. The company, in order to expand its reach beyond the saturated domestic market and increase penetration in under-penetrated developing regions, introduced Express Wi-Fi App in the quarter.

For the first quarter, the Zacks Consensus Estimate for monthly average users (MAUs) is nearly 2.2 billion, while daily average users (DAUs) are expected to be 1.45 billion.

However, the company’s News Feed algorithm change to limit public content, news and video remains a concern. It had brought down time spent on the platform by 5% or an estimated 50 million hour per day in the last reported quarter and thus remains an overhang on user engagement in the soon-to-be reported quarter as well.

Moreover, Facebook needs to tread cautiously so as not to irritate users with too many ads. Competition from the likes of Snapchat SNAP, Twitter TWTR and Alphabet GOOGL for ad dollars is also concerning.

Additionally, as the company increases investments in security and safety measures, costs are on the rise, which may put pressure on its bottom line.

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 +0.21% and that indicates a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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