Facebook, Inc. FB is set to report fourth-quarter 2017 results on Jan 31. We believe the company’s strength in online and mobile advertising revenues, coupled with expanding Instagram user base, will drive top-line and earnings growth.
However, the Russian advertising fiasco, never-ending privacy-related issues, fake-news problem and intensifying competition for ad-dollars can weigh on its results.
Earnings Trend Impressive
Facebook beat the Zacks Consensus Estimate in each of the trailing four quarters, with an average positive surprise of 14.02%.
The company’s third-quarter 2017 earnings of $1.59 per share and revenues of $10.33 billion beat the Zacks Consensus Estimate of $1.29 and $9.88 billion, respectively.
The Zacks Consensus Estimate for fourth-quarter revenues is currently pegged at $12.56 billion. The Zacks Consensus Estimate for earnings has remained steady at $1.94 per share over the last 30-days.
Digital Advertising Revenues to Drive Growth
Online and mobile advertising revenues are likely to remain key catalysts. Facebook’s mobile ad business has fast emerged as a major contributor to its advertising revenues. Mobile monetization has increased with higher number of marketers, continuing investment in new products and robust performance of its newsfeed ads.
Ever since its availability to worldwide advertisers last year, Instagram’s ad platform has emerged as an important cash cow for Facebook. Instagram’s expanding user base, which is now closer to 1 billion, offers significant growth opportunities to advertisers. Instagram Stories platform also boasts 250 million daily average users.
In order to attract advertisers, during the quarter, the company experimented with ‘news subscription models in Instant Articles’ that enabled news publishers to add subscribers to their platforms.
The Zacks Consensus Estimate for advertising revenues stands at $12.31 billion, nearly 43% above the year-ago quarter figure.
Expanding User Base
Facebook’s mammoth user base of more than 2 billion enables it to fend off any competition. Although the company is approaching full penetration in North American and European markets, continued growth in Asia and the rest of the world should help cushion user growth in the foreseeable future.
Facebook’s focus to “give people the power to build community and bring the world closer together” can be an important growth factor. The company’s acquisition of TBH in October is a step forward toward this endeavor.
Facebook is striving hard to improve user engagement. The company has partnered several restaurants and food-ordering services to enable U.S. users to order food through the platform.
For the fourth quarter, the Zacks Consensus Estimate for monthly average users (MAUs) is 2.13 billion, while daily average users (DAUs) are expected to be 1.41 billion.
Headwinds – Competition, Increasing Investments
Facebook has a cautious stance on revenue growth due to tougher year-over-year comparisons as well as lower ad load. Although Facebook has dominant position in the social media market, intensifying competition from the likes of Snap SNAP and Twitter TWTR is compelling it to continue making investments in product development.
Per Piper Jaffray’s 34th semi-annual Taking Stock with Teens survey, Snap's messaging application, Snapchat, once again emerged as the most preferred social networking medium among teens, followed by Instagram. Twitter and Pinterest finished at the fourth and fifth spots.
Moreover, as the company increases investments in security and safety measures, post the Russian ad-fiasco, costs are on the rise. The company is also investing in artificial intelligence (AI) and other measures to tackle the fake-news problem as well as terrorism on its platform.
Further, Facebook’s business practices related to privacy and data continues to face strict scrutiny by regulators particularly in the European Union (EU).
What Our Model Says
According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.
Facebook has a Zacks Rank #2 and an Earnings ESP of 2.04%, which indicates a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Stocks to Consider
Here is a stock you may want to consider as our proven model shows that it has the right combination of elements to post an earnings beat this quarter.
NVIDIA NVDA has an Earnings ESP of +4.71% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here..
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