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Facebook Q4 Preview: Buy FB Stock Before Earnings?

Benjamin Rains

Facebook FB is one of many tech giants scheduled to report its quarterly earnings results this week. FB shares have outperformed the S&P 500 and its industry over the last year despite continued backlash and political scrutiny.

The Social Media Power’s Pitch

Facebook’s pitch to Wall Street and investors remains unchanged at its core. The social media company is one of the world’s most powerful digital advertisers, alongside Google GOOGL. FB is projected to account for more than 22% of total U.S. digital ad spending in 2019.

Facebook’s importance is only likely to grow in the subscription-based streaming age as consumers pay to avoid ads everywhere from Netflix NFLX and Disney+ DIS to Spotify SPOT. Going forward, digital advertising is expected to climb from 46% of the total global ad market in 2018 to 60.5% by 2023, according to eMarketer.

And Mark Zuckerberg’s firm has continued to amass millions of new users every quarter, despite all the public backlash.

Last quarter, Facebook’s daily active users climbed 9% to 1.62 billion, while MAUs popped 8% to 2.45 billion—both growth figures roughly matched Q1 and Q2. Facebook’s “Family” of services now includes its namesake platform, Instagram, WhatsApp, and Messenger, and company executives estimate that roughly 2.7 billion people use at least one each month.

Facebook also understands that it must become more than a digital advertiser, which is why it has expanded into new areas such as e-commerce, through its Facebook Marketplace. FB has also bolstered its streaming and live video unit, as it dives deeper into augmented reality and more. 

 

 

 

 

What Else

Investors should remember that last quarter Zuckerberg decided to continue to allow uncensored political ads to run across Facebook’s various platforms, which stood in direct opposition to Twitter TWTR. And Zuckerberg and Facebook will likely continue to grab headlines as the 2020 election cycle heats.

Facebook has already paid a historic $5 billion Federal Trade Commission fine and will continue to “make structural changes and build a rigorous privacy program that will set a new standard” for the industry as part of its FTC settlement. But it still faces additional probes as part of a broader look into big tech.

Despite all the worries, investors can see that Facebook recently climbed above its summer 2018 highs. FB stock is up 46% in the last year and 14% in the past three months. Facebook shares closed at $214.87 per share Monday, having dipped recently along with the rest of the market on coronavirus fears.

Meanwhile, unlike Apple AAPL, Microsoft MSFT, and the S&P 500, Facebook’s valuation picture is not stretched too thin. Facebook is trading at 23.5X forward 12-month Zacks earnings estimates, which marks a discount against its industry’s 30.8X average and not too far off from its three-year median of 22.7X.

 

 

 

 

Outlook

Facebook’s Q4 sales are projected to jump 23.4%, based on our current Zacks estimates. This would mark a slowdown from FB’s 28% top-line growth last quarter. Overall, FB’s fiscal 2019 revenue is projected to climb roughly 26% to $70.51 billion.

FB’s fiscal 2020 revenue is then expected to climb roughly 21.6% higher to touch $85.74 billion. Both of these fiscal year estimates would see Facebook post its slowest sales growth as a public firm.

For example, FB’s 2018 sales jumped over 37%, with 2017 up 47%, and 2016 up 54%. With that said, Wall Street has clearly seen this coming and been willing to dive into the stock over the past year.

On the bottom line, FB’s adjusted Q4 earnings are projected to pop 5.5%. However, FB’s full-year earnings are still expected to slip 16% as it spends more heavily on everything from security to expansion.

Peeking further ahead, however,  a comeback appears to on, with its Q1 FY20 earnings projected to soar 128% to help lift full-year FY20 earnings by 43% above our 2019 projection.

Bottom Line

Facebook closed the third quarter with $52.27 billion in cash, cash equivalents, and marketable securities. Plus, the company had a 41% operating margin, down only 1% from the year-ago period despite higher spending.

FB stock is currently a Zacks Rank #3 (Hold) that sports “A” grades for both Growth and Momentum in our Style Scores system.

At this point, investors should most likely wait until after Facebook reports its Q4 results after the closing bell Wednesday, January 29 to see how Wall Street reacts, especially given the broader virus-based market fears. Nonetheless, Facebook appears as though it boasts fundamentals that could see FB stock continue its longer-term climb.

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