Earnings

After a barrage of mostly negative headlines in recent months, Facebook reports after the bell Wednesday. Despite the headwinds, analysts remain mostly bullish that the social media titan looks strong heading into the report where they’ll be watching for key metrics on ad revenue, privacy, and messenger integration.

Facebook has come under tremendous pressure from regulators and congress to improve privacy and security. CEO Mark Zuckerberg recently wrote a 1,000 word op-ed defending the company and Facebook shares are down over 12 percent year to date.

J.P Morgan’s Doug Anmuth called Facebook “the most discussed and most controversial Internet name based on our recent investor meetings & calls, and we view sentiment as mixed heading into 4Q earnings.”

In her Facebook preview note, Goldman Sachs analyst Heather Bellini points out that, “we note Facebook’s history of beating consensus revenue expectations…With the exception of the last two quarters, FB has reported revenue above consensus in each of the last 12 quarters, beating Street expectations by an average of 4% ($250-$300mn)… Despite the revenue shortfall in the last two quarters, we see potential for outperformance this quarter.”

Other analysts warned not to read too much into the company’s report. Deutsche Bank’s Lloyd Walmsley said, “we like FB shares for 2019 but do not view 4Q results as a positive catalyst, but expect more potential for estimates to increase later in 2019. BMO’s Dan Salmon cautioned that, “we believe FB could outperform so long as Custom Audiences capabilities are not hindered by regulation and negative press doesn’t thwart agencies/ brands, but visibility remains low.”

The shares were up 2 percent on Wednesday ahead of the report.

Here’s what some of the other analysts think:

“We see upside to our revenue forecast based on our field work, with Instagram driving upside to results and increasing ad load on Instagram Stories… We are modeling total revenue and GAAP EPS of $16.56bn (+28% yoy, +21% q/q) and $2.24 versus FactSet consensus of $16.41bn (+27% yoy, +20% q/q) and $2.19, respectively. Last quarter, management guided to mid to high-single-digit deceleration in 4Q compared to a high-single digit percentage decline prior. Our estimates imply a 5pp deceleration in 4Q (from 33% to 28%) vs. consensus which is implying a 6pp deceleration. On a constant currency basis, we’re modeling 29% yoy revenue growth vs. 34% in 3Q18 (our estimates versus consensus can be seen in Exhibit 1 for all key metrics)… We note that short interest for FB is currently at 34.5mn shares, above the 12-month average of 27.9mn shares… Our field checks point to consistency in ad spend on the main Facebook app albeit at decelerating levels, with outsized growth on Instagram.”

“We think 2019 is likely to end better for FB than it started… Our core view is that stories and video usage could stabilize/improve FB engagement, while greater monetization of stories, messaging and video, plus easier comps could stabilize revenue growth in the back half of 2019… We have been surprised by the high opex and capex growth outlook, but are optimistic that expense growth will better map revenue growth in 2020… Following a flattish 2019 for EPS, we think the potential for acceleration in EPS growth to close to 20% in 2020E will be increasingly discounted in the stock as 2019 progresses… Our checks throughout 2018 have suggested direct response ad spending strength, while branded has slowed, and 1Q generally a bigger brand mix vs. 4Q… While the stock may be subject to some estimate volatility for FX and investments, we think 2019 estimates are near a bottom and now have plenty of expense cushion built in for future years… We are at EPS of $7.49 in 2019 (vs street at $7.38)…”

“We like FB shares for 2019 but do not view 4Q results as a positive catalyst, but expect more potential for estimates to increase later in 2019… Core FB engagement should stabilize as we comp the changes to the newsfeed algorithm, and our audience tracking in the ad platform suggests targeting trends remain largely consistent with prior quarters (younger demos continue to trickle off core Facebook and growth is largely being fueled by international users and the 35+ demo)… We acknowledge it may be difficult for shares to work as revenue growth should step down again in 1Q and call commentary will likely reflect that, but we expect stability from 1Q to 2Q with increasing focus on the potential for re-acceleration and for margin stability…”

“We remain positive on FB into 4Q based on: 1) steady overall engagement w/Instagram strength & core FB facing an easier time spent comp from a year ago; 2) strong 4Q ad checks pointing to managed revenue decel w/Y/Y growth down MSD pp from 3Q, but still growing 30% FXN Y/Y; & 3) expectations for 40-50% opex growth in ’19 well understood, w/potential to better align spend growth w/revenue into 2020…”

“Can Instagram, stories and messaging initiatives drive incremental growth as the blue app and feed usage matures? – We expect Facebook to continue optimizing its messages and stories platforms… The company previously noted users are increasingly engaging with these products, and we anticipate Facebook will pursue further monetization (i.e., paid messaging, ads in stories) within these ad categories given their rising popularity and non-invasive format…How will anticipated 2019 investment be allocated and will it yield margin expansion in 2020? – We expect a meaningful portion of incremental 2019 investment to be focused on safety and security, which will not likely drive clear monetization improvement over the next several years (but better positions the products for the long term)…We increased our 2019 revenue estimate by $210mm to $68.32bn based on improving monetization trends from Instagram stories, as evidenced by Comscore engagement data, and we increased our operating expense growth estimate (+44% vs +41% previously) to align closer with the midpoint of management’s guidance of 40-50%… Our 2019 EBITDA, net income and EPS estimates are now lower by $1.10bn, $972mm and $0.34, respectively…”

“Risk/reward favorable amidst a tricky transition… Street 4Q revenue estimates stand at just under +30% on an FXN basis, implying ~450bps of organic decel (~610bps, reported)… While our check with Wpromote and separate data from AdParlor suggest acceleration in spending growth, data from Kenshoo noted a high-single digit decel vs 3Q rates. With checks mixed, we believe buy and sell side revenue expectations are generally in agreement… Margins are likely less of a focus for 4Q results given the expectation of ~1,000bps of op. margin compression over the next year to the mid-30s… In terms of the forward commentary, bulls will look for an indication that Stories monetization growth will mitigate the size of the “air pocket” caused by the engagement transition… By contrast, if results are in line, and we hear that the current pace of revenue decel is going to persist, FY19 revenue est. could prove aggressive… Also look for commentary related to yesterday’s NYT story on plans to integrate messaging across WhatsApp, Messenger, and Instagram…”

“We are raising our Instagram and Stories ad estimates (across both Facebook and IG) but lowering our Facebook and IG Feed and total FB advertising revenues to reflect slightly more caution after attending AdExchanger’s Industry Preview last week and catching up with industry contacts… FB, however, does remain our favorite Market Perform stock as the Street now incorporates our more cautious view on margins…. We believe FB could outperform so long as Custom Audiences capabilities are not hindered by regulation and negative press doesn’t thwart agencies/ brands, but visibility remains low…”

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