Social media giant Facebook (FB - Free Report) is set to release second-quarter fiscal 2017 results on July 26 after market close. After seven consecutive quarters of earnings and revenue beat, what is in store for the company in the Q2 reporting cycle?
Investors should note that Facebook has had an impressive run so far this year, hitting fresh highs and locking in gains of about 31.3%, clearly outperforming the industry by a wide margin. This trend is likely to continue given the positive earnings revision trend, which is generally a precursor to an earnings beat, and attractive fundamentals though earnings surprise is difficult to predict at this time (read: Tech ETFs on Fire as Q2 Earnings Season Heats Up).
Inside Our Methodology
Facebook has a Zacks Rank #1 (Strong Buy) and an Earnings ESP of 0.00%, which makes surprise prediction difficult. According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP makes us confident in predicting an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The stock saw positive earnings estimate revision of eight cents over the past 90 days for the second quarter. Additionally, Facebook’s earnings surprise history is robust with the company delivering a positive earnings surprise of 16.69% on average over the past four quarters. It is expected to post solid earnings growth of 48.86% and revenue growth of 42.53% in Q4 (see: all the Technology ETFs here).
Further, the stock boasts a solid Industry Rank in the top 35% with a top Growth Style Score of A and a Momentum Style Score of B. However, Value Style Score of D look unfavorable. According to the analysts polled by Zacks, Facebook has an average target price of $169.25 with more than 90% giving a Strong Buy or a Buy rating ahead of the company’s earnings.
What to Watch?
The focus will be on advertising revenue growth when the company reports Q2 results. This is because the social media giant warned of a slowdown in advertising revenue growth as ad load (the ratio of ads to personal posts), one of the three key contributors to advertising revenue growth, will start to taper in the second half of 2017 (read: Is the Tech Rout Overstated? Buy 3 Stocks & ETFs on the Dip).
With declining ad growth, investors are looking for meaningful growth in other sources of monetization bets like Instagram and Live.
Last month, Facebook stated that its monthly active users crossed the 2 billion mark with WhatsApp and Facebook Messenger having roughly 1.2 billion users and Instagram having over 700 million users. This indicates the company’s dominance over other media players continues as Alphabet’s (GOOGL - Free Report) YouTube has 1.5 billion users, Tencent’s (TCEHY - Free Report) WeChat has 889 million, and Twitter (TWTR - Free Report) and Snap's (SNAP - Free Report) Snapchat have about 328 million and 255 million users, respectively.
ETFs in Focus
Given the positive estimate revisions and Facebook's attractive fundamentals, investors could focus on ETFs having the largest allocation to the social media giant. While there are several ETFs in the space having FB in their roster, we have highlighted seven funds that have the social media giant in their top five holdings:
Global X Social Media Index ETF (SOCL - Free Report) — The fund has delivered returns of 40.7% since the start of the year and has a Zacks ETF Rank of 1 with a High risk outlook. Facebook takes the third spot with 10.1% allocation.
iShares Dow Jones US Technology ETF (IYW - Free Report) — This ETF has a Zacks ETF Rank of 1 with a Medium risk outlook and has surged 23.4% since the start of the year. Facebook is the third firm with 8.5% allocation (read: Tech Index Breaks Dotcom Era Record: ETFs to Buy).
First Trust Dow Jones Internet Index (FDN - Free Report) — The fund has gained 26.7% in the same time frame and has a Zacks ETF Rank of 2 with a High risk outlook. Here, FB occupies the top position, accounting for 8.4% share.
PowerShares Nasdaq Internet Portfolio (PNQI - Free Report) — It climbed 35.1% and has a Zacks ETF Rank of 2 with a High risk outlook. Here, Facebook takes the second spot with 8.2% share.
AdvisorShares New Tech and Media ETF (FNG - Free Report) – This is the new ETF debuted early this month, offering exposure to the FANG stocks. Facebook is the second firm accounting for 8% allocation. It is up 2% since inception (read: Is the New FANG-Themed ETF Well Timed?).
Select Sector SPDR Technology ETF (XLK - Free Report) – The fund added 20% in the same time frame and has a Zacks ETF Rank of 2 with a Medium risk outlook. Facebook occupies the third position and accounts for 7.3% share.
Vanguard Information Technology ETF (VGT - Free Report) — This product is up 23.2% and has a Zacks ETF Rank of 2 with a Medium risk outlook. FB takes the fourth position in the portfolio and makes up for 6.6% share in the basket.
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