Facebook shares open strong ahead of Q3 earnings

Published on: 01 Nov, 2017

Facebook Inc. (NASDAQ: FB) is expected to report its third quarter earnings for the 2017 fiscal year after market close on Wednesday. Shares opened strong on Wednesday morning and peaked at 1.3 percent.

The social media tech giant is expected to have a positive third quarter due to its strong ad revenue growth rate, as analysts are expecting EPS of $1.28 on revenue of $9.84 billion.

Deutsche Bank analyst, Lloyd Walmsley, sent a note to clients that investors can expect to see a 42 percent increase year over year in ad revenue. In the third quarter of the previous fiscal year, Facebook had reported ad revenue of $6.8 billion, which was up 59 percent year over year.

Facebook generated 98 percent of revenue last quarter solely from ad business.

Despite the Facebook’s testimony at Capitol Hill on Tuesday, along with the other tech giants, Amazon.com Inc (NASDAQ:AMZN) and Twitter Inc. (NYSE:TWTR), shares still rose on Wednesday.

Facebook told Congress at the hearing that the ads revolving around the Russians meddling with the 2016 U.S. Presidential elections may have reached as many as 126 million U.S. users over a two year span.

The number Facebook had said at the hearing was much larger than the company’s estimates. The company received negative public attention as it may have affected the role in allowing Donald Trump to win the Presidency.

Although, ad revenue is Facebook’s primary growth driver, the Russian ads seem to have no effect on Facebook at all. In the past week, Facebook shares rose 6 percent as the its hearing approached.

Facebook’s hearing in front of Congress for the ads may have seemed to be offset by Amazon’s and Alphabet earnings, as well as the company having no knowledge of the ads. Amazon shares rose as high as 11 percent, while Alphabet shares rose by 6 percent, as both companies hit an all time high in shares.

But lawmakers want to now enforce stricter regulation for Facebook and other digital advertising companies, and those proposed regulations come at a time when Facebook’s revenue growth is already slowing down, according to Recode.

Although Facebook says its revenue growth is slowing down, the company still reported a $1.3 billion increase in total revenue from the first quarter to the second quarter for fiscal year 2017.

As Facebook’s growth rate begins to slow down, the company is shifting its focus to increase user engagements with videos and its new subscription platform, which can generate even more profits.

And with the increase in daily active users, which was 1.32 billion in the second quarter, this positions Facebook is in a strong position to increase user engagement on ads through its platform.

Facebook shares have now increased 57.3 percent year to date.

Facebook is performing almost 20 percent better than the S&P 500 average. According to Nasdaq, Valuation concerns have emerged as Facebook’s stock is now trading at 33 times fiscal 2017 estimates of $5.34 per share, compared to a forward P/E of 19 for the S&P 500 index.


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Danny Abramov

Email: danny@financialinsiders.com


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