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Facebook (FB) Q1 Earnings to Gain on Ad & Stories Momentum

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Facebook (FB - Free Report) is set to report first-quarter 2019 results on Apr 24.

Notably, the company has an impressive earnings surprise history, beating the Zacks Consensus Estimate in three of the trailing four quarters, the average being 13.5%.

In the last reported quarter, monthly active users (MAUs) increased 191 million on a year-over-year basis and 49 million sequentially to 2.320 billion. Moreover, Daily Active Users (DAUs) were 1.523 billion, increasing 122 million year over year and 28 million sequentially, and representing 66% of MAUs.

Despite a plethora of controversies surrounding Facebook, subscriber growth is expected to continue in the first quarter, driven by the adoption of Instagram, WhatsApp and Messenger, particularly in Asia-Pacific.

Moreover, advertisers seem to be upbeat about the company despite a likely slowdown in the core Facebook app. This is due to the growing demand for videos and Music across the company’s platforms. Growing popularity of Stories is also playing a significant part.

Facebook, Inc. Price and EPS Surprise

Facebook, Inc. Price and EPS Surprise | Facebook, Inc. Quote

Revenue Growth Rate Likely to Decline in Q1

However, total revenue growth rate in the first quarter of 2019 is projected to decline mid-single-digit percentage (on a constant currency basis) compared with the fourth-quarter 2018 growth rate. Notably, continued mix shift toward Stories is expected to hurt ARPU.

The Zacks Consensus Estimate for revenues is pegged at $14.96 billion, indicating an increase of almost 25% from the year-ago quarter’s reported figure. However, the estimated growth rate is lower than 33.1% (at constant currency) reported in the previous quarter.

Moreover, higher security related spending is anticipated to keep margins under pressure. Facebook ended 2018 with more than 30,000 people working on the safety and security of its platforms, up from 10,000 people a couple of years ago.

The consensus mark for first-quarter earnings is pegged at $1.65, unchanged over the past 30 days.

Stories, Watch & Music to Drive Ad Momentum

Facebook has been benefiting immensely from the growing popularity of Stories. Notably, Instagram and WhatsApp are the top two popular Stories products in the world. Instagram has more than 500 million daily active users on Stories.

Moreover, based on its deals with Universal Music Group (UMG) and global music communities in more than 40 countries, Facebook is encouraging users, more than 2.7 billion, to use music across its “Family of services.” The company’s services include Facebook, WhatsApp, Instagram and Messenger.

The company has also introduced a feature that allows users to listen to the full song on Spotify (SPOT - Free Report) , after it is posted on their Facebook profile. During the quarter, the company partnered with three Indian music labels that now allow users in India to add music to their videos, stories and posts on both Facebook and Instagram.

These initiatives are expected to have boosted user engagement in the first quarter and driven demand for ad slots thereby attracting advertisers. Recently, the company launched a new program, Facebook Showcase, to offer new advertising options for premium video content. The program allows advertisers to purchase ad spots in advance at a fixed cost.

This may help Facebook at a time when Alphabet’s (GOOGL - Free Report) Google, YouTube and Twitter (TWTR - Free Report) are constantly trying to dominate the digital ad space. Amazon (AMZN - Free Report) is also aggressively focusing on growing its ad business.

Facebook Infusing AI to Secure Platform

Meanwhile, Facebook’s endeavors to secure the platform are commendable. AI is now used to identify and more quickly review ads that might breach the company’s policies related to fake news and misinformation.

The company recently announced plans to introduce features that will completely secure user data on its messaging platforms, thereby making data accessibility harder.

Currently, WhatsApp has an end-to-end encryption feature and Instagram has an ephemeral messaging feature i.e. messages that cease to exist after a set time.

Facebook currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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