Earnings are set to be robust, but will expenditure ease?
Facebook Inc. reports Q3 2019 earnings on Wednesday 30th October, after the U.S. market close
Epicentre of scrutiny
Facebook remains at the epicentre of growing regulatory threats that could eventually clip Big Tech’s wings, with CEO Mark Zuckerberg recently grilled by a high-profile Congressional committee as probes into whether FB and others are using their dominance to thwart competition gather pace. A record $5bn fine to settle U.S. claims that it repeatedly violated users’ privacy buffeted the stock even after a strong Q2. Facebook also faces antitrust and privacy probes in Europe.
Despite all this, there’s been no clear chill detectable in investor appetite for Facebook shares of late. They’ve eased from a 30% ascent relative to the S&P 500 between the start of 2019 to July. But they were still outperforming the benchmark by 17.5% over the year to date on Wednesday. Boosted advertising sales growth on the back of Facebook Stories, that buoyed Q2, should remain evident in Q3, despite softer guidance. Rising video adoption and better-managed pricing volatility pose upside risks to forecasts. Instagram (now including Instagram TV) monetisation of which is still being incubated, also supports valuation multiples regardless of quarterly outcomes.
One front where investor scrutiny of FB’s third and forthcoming quarters will be acute is expenditure. Like many Big Tech counterparts, the social media group has been pumping vast sums of cash into initiatives aimed at securing future growth and markets, getting ahead of rising global demand for better user health, privacy and security, as well as a likely more onerous regulatory environment in the years ahead. A risk of higher provisions for legal costs and settlements does not look particularly priced into the stock at present. Additionally, with free cash flow mostly negative for the last two years of intense investment, Wall Street is eyeing a return to cash generation in 2020.
Investors are already primed for spending to show a fairly hefty ramp in the current financial year. However, Facebook could well signal a pause in the quantum of spending growth by tightening 2019 operating expenditure guidance from its current 37% to 45% range. But any hints from Wednesday’s report that Facebook’s expenditure story has further to run could take some of the shine off earnings-fuelled enthusiasm by the shares.
Low scale Libra concern
Aside from spending, investors continue to signal that other present or future headwinds are relatively immaterial. For instance, flake outs by high-profile corporate partners from Facebook’s cryptocurrency project, Libra, as well as strident opposition from central banks, are a headache, though not much more, for the moment.
Key estimates (consensus compiled by Bloomberg)
3Q adjusted EPS: $2.28, +8.5% year-on-year
3Q revenue: $17.35bn +26.4%
3Q daily active users: 1.6 billion, up 7.5% year-on-year
3Q monthly active users: 2.45 billion, up 7.6% year-on-year
3Q gross margin: 80.2%
4Q adjusted EPS: $2.92
4Q revenue: $20.94bn
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.