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Social Media Earnings: Facebook And Twitter Prepare To Share

JJ Kinahan

Earnings are in full swing this week and technology investors who hold any of the nation's major social-media companies are likely preparing for a hectic few days. Facebook Inc. (NASDAQ: FB) and Twitter Inc (NYSE: TWTR), two platforms on which millions of investors and non-investors alike share their memories, gripes and sometimes everyday mundane doings through posts and tweets, are opening their books this week.

Both social-media giants reported double-digit revenue growth in Q1 as their active users numbers climbed, helping to rev up advertising dollars. FB is at the top of the mountain in both users and ad revenue, and TWTR looks to be holding its own, but on a smaller scale.

Have the companies been able to keep up the momentum in Q2? If their stock prices are any indication, it appears investors at least are keeping the faith. FB has been among the top tech guns elevating the S&P 500’s (SPX) climbs to fresh peaks — FB stock represents 1.9% of the index and is up some 50% since the beginning of the year. TWTR’s path has been a bit wobbly, but it has still managed to clock about a 28% increase.

Analysts watching FB say they will be looking for solid upticks in all the numbers and updates on a potential $5 billion fine for FB from the Federal Trade Commission. For TWTR, analysts may be looking at how TWTR says it’s monitoring those who violate the site’s community standards rules.

There’s a lot of focus on potential regulatory issues, and a key thing to consider is that companies under a government shadow might see less of a potential bullish response if their earnings beat. Even if FB and TWTR have killer earnings, the fact that they’re in the cross-hairs could limit gains for their stocks.

That dynamic arguably played out last week when Johnson & Johnson (NYSE: JNJ)—the subject of a Justice Department probe—didn’t get much lift despite an impressive earnings performance across the entire company. 

FB’s Regulatory Fines

FB is expected to move the conversation “away from putting out privacy fires and back toward innovation,” Barclays analyst Ross Sandler told MarketWatch. He said he will be looking for signs, for example, that advertisers are beginning to embrace FB’s “Stories” format—an Instagram copycat layout launched last September as a means of stepping up engagement between users and advertisers.

There are also a number of issues investors might be interested in hearing updates about, a few of which are tied to regulatory issues that some investors and analysts point out could be good for FB.

Every time FB announces that it’s settled with a government here or abroad, the stock gets a boost, Josh Brown, chief executive of Ritholtz Wealth Management said on CNBC. “The Street loves when there’s finality to those things,” he said.

Here’s a short list of issues analysts have said they will be listening to on FB’s conference call:

Updates on its $1 billion acquisition of Instagram in 2012 and its $19 billion acquisition of WhatsApp in 2014, both drivers of new users across diverse age groups.

What other mergers and acquisition FB might be toying with as it builds its user empire. FB typically acquires apps and companies that are outside its main offerings and tend to be attractive to a broad range of age groups, what McKinsey calls “programmatic M&A.” FB has acquired 72 companies since August 2005, according to Techwyse.com, at a cost of $23.36 billion.

Libra, the new cryptocurrency it’s launching that looks to be facing a barrage of headwinds from a nearly every commercial and political corner of the world. Mixing internet services with banking on a social media platform appears to be helping stir the controversy. But FB has said cryptocurrency could be the next best thing to the gold standard. Stay tuned.

That expected $5 billion fine that FB is said to have settled with the Federal Trade but has not been officially announced publicly. While $5 billion is a big chunk of change from nearly anyone’s pocketbook, investors should remember that FB already took a $3 billion charge in Q1 in anticipation of a multi-billion-dollar hit.

And if that doesn’t do it for you, think back to FB’s 2018 results:  Net income of $22.11 billion on $55.84 billion in revenue. And then there was its record-breaking Q1 of $15.1 billion in revenue.

Plus, the markets embraced the stock when the rumored $5 billion figure hit the headlines, reaching a fresh peak since the start of the year, possibly because it could signal that the end was near. It barely flinched when Libra was announced and the backlash began, possibly supporting Brown’s theory. The stock is up some 50% since the beginning of the year. 

Analysts polled by FactSet expect Facebook to report Q2 earnings per share of $1.87, up nearly 7% from the year-ago result of $1.74 a share, and revenue of $16.5 billion, which would represent a 25% increase from $13.23 billion.

FB reports Wednesday, July 24 after the bell with a conference call at 5 p.m. ET.

FB Options Activity

The options market has priced in an expected share price move of about 5.9% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Volume in both puts and calls have been elevated. Puts have been most active at the 192.5 and 195 strikes, and calls have seen higher volume at the 205 through 210 strikes. The implied volatility sits at the 45th percentile as of Tuesday morning. 

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.

TWTR’s Got a New Look

The pot is not nearly as full at TWTR, but investors might want to hear more about the short-messaging app’s tests to make conversation threads easier to follow. TWTR last week unveiled its latest plan to achieve that by using icons instead of labels in replies.

Will this help? Some would argue the platform’s interface isn’t that complicated to begin with.
Twitter also rolled out a new design with “a refreshed and updated website that’s faster, easier to navigate and more personalized,” according to the company’s release. Techies appear to have mixed feelings about it. The customization options look like they’re a hit, but some critics say they don’t like all the sidebar additions on the left. Change is never easy.

Some investors might want to know what those outages earlier in the month were all about. At the time, TWTR said the shutdown was due to an “internal configuration change,” but didn’t explain exactly what that meant and what might be the likelihood of it happening again.

And finally, TWTR said in late June that it was adding disclaimers to world leaders’ tweets that break the firm’s community standards if they are in the public interest.

How might TWTR determine where to draw the line between “public interest” and misinformation? “This is not about perceived bias but about providing more clarity if our rules have been broken,” a Twitter spokesperson told CNN Business.

TWTR is expected to report per-share earnings of $0.18—a 5.9% increase over the year-ago period—on revenue of $829 million—which would be a 16.6% lift from the year-ago period.

Twitter’s earnings are expected to be released on Friday, July 26, ahead of the market’s open.

TWTR Options Activity

The options market has priced in an expected share price move of about 9.4% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been relatively light, but heaviest at the 37.5 and 39 strikes. Put volume has been heavier overall, with the highest concentration at the 35 strike. The implied volatility sits at the 41st percentile.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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