Facebook Inc (NASDAQ:FB) will continue to deliver strong revenue growth.
Shares of social media giant Facebook Inc (NASDAQ:FB) jumped over 4.25% in yesterday's trade, driven mostly by an overall bullish sentiment around tech stocks. Tech stocks rallied on Friday after big tech firms such as Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) delivered better than expected third-quarter results. For Facebook stock, however, it was the strong performance of Alphabet Inc-C (NASDAQ:GOOG) in the third quarter which was the main driver. Facebook Inc itself is scheduled to report its third quarter earnings result on Wednesday. And while Facebook stock has remained under pressure for the most part of the quarter due to the "Russia Ad controversy", the sentiment is turning bullish after the strong earnings performance last week by other tech giants.
Revenue growth to slow down?
Facebook has earlier warned that the second half of the year could see slower revenue growth due to saturation in ad load. During the second quarter conference call, David M. Wehner, Facebook's CFO warned that:
As we have discussed before, we continue to expect that Facebook ad load will play a less significant factor driving advertising revenue growth going forward, and that desktop ad revenue growth rates will slow in the second half of 2017 when we begin to lap efforts to limit the impact of ad blockers.
However, analysts continue to expect robust top line growth. Wall Street expects Facebook Inc to report $1.28 in non-GAAP EPS, representing almost 18% YoY growth. This is lower than $1.32 EPS the company had posted in the previous quarter. Facebook has a good track record when it comes to meeting EPS estimates. In the second quarter, Facebook Inc had delivered an earnings surprise of 17%. And if you go by the so-called earnings whisper, the company is likely to report a beat again. Facebook's earnings whisper number is $1.4, 12 cents higher than analysts estimate.
On the top line front, Analysts' expect the company to report revenues of $9.84 billion, 40% higher than what the company had reported in the previous quarter. The revenue estimates show that Facebook will continue post strong top-line growth. Standard Media Index (SMI), an online ad data provider that relies on spending figures from ad agencies and other market intelligence, forecasts Facebook's North American ad sales will rise 10.4% sequentially and 43% annually in Q3 to $4.91 billion. That's above a $4.86 billion consensus analyst estimate.
Russia Ad Controversy is likely to dominate Facebook Inc earnings call.
Apart from the top and bottom line figures, one of the key things to watch during Facebook's third quarter earnings call will be the management's commentary on the ongoing Russia Ad investigations. Facebook is deeply embroiled in the Russia controversy. The revelations that Russia linked fake accounts purchased $100,000 worth of ads which reached 10 million Americans and was targeted at swing states with propaganda on everything from race to guns to gay rights has been a major blow to Facebook's reputation. Lawmakers on both sides of the aisle have called for more regulation of ads on social media companies. Two Senate Democrats are drafting legislation that would require social-media companies to disclose the same kind of information about political ads that broadcasters must—something that appears to have growing support at least among Democrats.
And it is not only in the U.S, several U.K parliamentarians have written to Facebook CEO, Mark Zuckerberg, asking him to search for evidence that Russia-linked Facebook accounts were used to interfere in the EU referendum and the general election as part of a parliamentary inquiry into “fake news”. There are also reports that reports the atrocities in Myanmar may be incited in part by fake news on Facebook. Given all the negative publicity, Facebook is trying to make amends. Facebook will roll out tools for increased transparency of political ads and says they should be functional before the 2018 midterm elections. Chief Executive Mark Zuckerberg has promised to hire 1,000 additional people to review political ads purchased on Facebook.
Update on "Watch" platform.
Another area of focus will be Facebook's video venture. Last quarter, the social media giant had launched 'Watch' a new subsection on its website for viewing videos. Facebook intends to make watching videos a "social experience". "Watch" will encourage users to not only watch content but also discuss it, one reason why it is interested in sports broadcasting. Earlier in the year, Facebook Inc had inked a deal with Major League Baseball to broadcast 20 games live on Facebook this season. Given the ad load saturation, Facebook is betting on videos to drive medium-term growth. Facebook is willing to invest up to a billion dollars on producing content.
Investors will be also watching out for an update on Facebook's monetization plan for its other properties. Facebook recently launched commercial messaging service on its WhatsApp platform called WhatsApp for business in few countries including India and Brazil. There are also reports that WhatsApp will launch a peer to peer payment service in India. Facebook is also monetizing its Messenger platform. All in all, Facebook stock remains a good long term buy. We rate Facebook stock 4.6 on a scale of 5, given its strong revenue growth, high cash flows, and profitability.
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