It has been about a month since the last earnings report for Facebook (FB - Free Report) . Shares have lost about 6.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Facebook due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Facebook Q1 Results Benefit From Solid User Growth
Facebook reported first-quarter 2019 earnings of 85 cents per share that lagged the Zacks Consensus Estimate by a whopping 81 cents. The figure plunged 50% from the year-ago quarter.
The company recorded legal expenses of $3 billion (which is not tax-deductible) related to the ongoing U.S. Federal Trade Commission (FTC) investigation of its platform and user data practices. This negatively impacted the first-quarter bottom-line figure.
However, revenues of $15.08 billion comfortably surpassed the Zacks Consensus Estimate of $14.97 billion and rose 26% year over year. At constant currency (cc), revenues rallied 30.2%.
Geographically, the United States & Canada was the strongest region, with revenues growing 29% year over year, followed by the Asia-Pacific’s 28.3%, Rest of the World’s (RoW) 22.6% and Europe’s 20.2%.
The company estimates that more than 2.1 billion people now use its “Family” of services, which includes Facebook, WhatsApp, Instagram and Messenger, every day on average. Moreover, almost 2.7 billion people use at least one of its services on a monthly basis.
Monthly active users (MAUs) were 2.375 billion, up 8.2% year over year. Daily Active Users (DAUs) were 1.56 billion on average for March 2019, increasing 7.8% year over year and representing 66% of MAUs.
Despite being surrounded by a plethora of controversies and increasing call for regulation worldwide, Facebook’s ability to attract users and keep them engaged through its “Family” of services is noteworthy. This drove advertising revenues in the reported quarter.
Advertising revenues rallied 26.4% year over year (31% at cc) to $14.91 billion. The United States & Canada and Asia-Pacific were the strongest regions, growing 29.6% and 28.4%, respectively. Advertising revenues in the RoW and Europe grew 22.9% and 20.6%, respectively.
Mobile ad revenues rose 30% year over year to $13.9 billion, contributing 93% to total ad revenues. Top 100 advertisers represented less than 20% of Facebook’s total ad revenues, indicating a diverse advertiser base.
Ad impressions served increased 32%, driven by ads on Instagram Stories and Feed, and Facebook News Feed.
However, average price per ad decreased 2% from the year-ago quarter due to unfavorable mix shift toward Stories ads and geographies that monetize at lower rates.
Average Revenue per User (ARPU) growth was strongest in the United States & Canada, increasing 27.7% year over year, followed by Europe’s 17.6%. ARPU in Asia-Pacific and RoW grew 13% and 12.5%, respectively. Worldwide ARPU increased 16.1% to $6.42.
Payments and other fees declined 3.5% year over year to $165 million.
Asia-Pacific: Fastest Growing Market
Asia-pacific was Facebook’s fastest growing market in the quarter, driven by growth in India, Indonesia and the Philippines.
Asia-Pacific DAUs increased 13.4% year over year to 600 million. DAUs in RoW, Europe and the United States & Canada increased 8.2%, 1.4% and 0.5% to 490 million, 286 million and 186 million, respectively.
MAUs in the Asia-Pacific, RoW, Europe and the United States & Canada regions increased 12.4%, 8.9%, 8.2% and 0.8% to 981 million, 768 million, 384 million and 243 million, respectively.
Enhanced Focus on Security Initiatives
CEO Mark Zuckerberg stated that Facebook is taking help from experts to decide acceptability of content. The company is also working on making its products and services end-to-end encrypted and ephemeral, so that user information is not available for long.
During the quarter, Facebook updated the “Why am I seeing this ad?” feature to provide users more control over the ads they view. The company also launched the “Why am I seeing this post?” feature that informs users about the content that shows up in their News Feeds. This feature also enables users to change their preferences on the platform.
The aforesaid features aim at improving transparency that Facebook believes will help it regain user trust over the long term.
The company is also working to improve transparency related to elections globally. As part of its initiatives, the company has expanded its Ads Library that includes electoral ads, making it easier to search for bad ads and report them.
Moreover, Facebook now requires anyone running political or issue ads in the European Union (EU) to confirm their identity and location, and include a “paid for by” disclosure. This restriction was imposed to ensure transparency for the upcoming European Parliament elections in May.
Additionally, the company is trying to reduce discrimination in the areas of housing, employment and credit. In March, Facebook announced that anyone running ads in these categories will no longer be allowed to target any age group, gender or zip code in the United States.
The company is also building a new library to enable people to search through active housing ads and report them.
However, these changes are expected to negatively impact some advertisers’ ability to run legitimate ads on the platform.
Stories Gaining Prominence
Nevertheless, Facebook is focused on attracting advertisers through better solutions. Notably, Facebook and Instagram feed ads make up the majority of the company’s business. Although the company expects this to continue, Stories are increasingly becoming an important growth opportunity for advertisers.
Notably, Stories have more 500 million active users. Facebook also stated that 3 million advertisers are using Stories Ads to reach customers across Instagram, Facebook and Messenger.
Moreover, to improve interaction among people, businesses and advertisers, the company launched Interactive Stories Ads globally on Instagram during the quarter.
As part of its e-commerce endeavor, Facebook recently announced the Checkout feature on Instagram, which is currently in a small closed beta. This feature allows people to buy merchandise that they viewed in a post or story without leaving the app. Checkout was launched with 23 brands in the United States, including adidas and MAC.
Facebook stated that it is seeing millions of interactions between buyers and sellers in Marketplace every day. Expansion of Marketplace ads to more countries is generating positive results in this aspect.
Further, the company launched the Collaborative Ads feature, which enables brands having no direct-to-consumer channel run e-commerce campaigns with retailers.
In the reported quarter, costs and expenses jumped 80.5% year over year to $11.76 billion. The figure includes a $3-billion accrual related to the inquiry of the FTC into the company’s platform and user data practices.
Marketing & sales expenses rallied 26.6% from the year-ago quarter to $2.02 billion. General & administrative expenses skyrocketed 436.9% year over year to $4.06 billion. Also, research & development expenses rose 27.8% to $2.86 billion.
Notably, Facebook’s employee base increased 36% year over year to 37,773.
Operating income of $3.32 billion plunged 39.1% year over year.
Balance Sheet & Cash Flow
As of Mar 31, 2019, cash & cash equivalents and marketable securities were $45.24 billion compared with $41.11 billion as of Dec 31, 2018.
Capital expenditures were $3.96 billion, driven by investments in data centers, servers, office facilities and network infrastructure.
Free cash flow was $5.35 billion compared with $5.05 billion in the year-ago quarter.
Facebook bought back shares worth almost $521 million in the reported quarter.
The company expects revenue growth rates to decline sequentially throughout 2019 at cc. The company expects ad targeting related headwinds to hurt its performance more in the second half of 2019.
Moreover, 2019 total expenses are now expected to increase 47-55% from 2018, up from the previous guidance of 40-50% growth. Excluding the $3-billion accrual, the revised expense outlook indicates a modest reduction in core expense growth rate for 2019.
Capital expenditures are now expected to be $17-$19 billion, down from the previous guidance of $18-$20 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.28% due to these changes.
At this time, Facebook has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Facebook has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.