Has Facebook Stock Bottomed? Today’s Q3 Earnings Might Tell

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  • Reports Tuesday, October 30, after the market close
  • Revenue Expectation: $13.8B
  • EPS: $1.47

Facebook Inc. (NASDAQ:FB) is scheduled to report earnings today after the market close. The social media giant has to put together an impressive show in order to regain investors’ confidence, which has been rattled by privacy breaches, threat of government regulations, and increasing costs.

The majority of Wall Street analysts are hopeful that the worst for Facebook stock is over and that its Q3 earnings report will put to rest doubts about Mark Zuckerberg’s leadership and prove that he’s ready to steer the company out of its biggest crisis since going public in May of 2012. However, we think there is still a lot of work left to be done to make Facebook’s platform acceptable for regulators who want the company to show that it has all the necessary infrastructure in place to stop the spread of fake news as well as state-sponsored manipulators trying to influence public opinion.

In order to make that all happen, Facebook will have to spend more money. It will have to shift its focus and resources to the security and reliability of its network. The rising costs on these items is the biggest threat to Facebook’s near-term outlook. We don’t think Mark Zuckerberg is done with this massive undertaking just yet.

After the devastating Cambridge Analytica scandal earlier this year, the company recently disclosed yet another hack involving millions of people. It is also facing allegations that it sought access to financial firms’ customer data.

Has Facebook Stock Bottomed? Today's Q3 Earnings Might Tell

Monthly Facebook Chart: 2015-Present

Facebook shares, which closed yesterday at $142, are trading at their lowest level since May 2017. The stock will continue to remain under pressure due to the aforementioned rising costs as well as slowing expansion of new subscribers in the fourth quarter.

Though we haven’t seen a major pullback in advertising revenue yet, Facebook will have to quickly monetize its other properties such as Whatsapp, as a way to fuel future growth and make up for the potential shortfall.

Analysts Estimate Jump In Monthly Users

Costs, advertising revenue, and the number of users are the three main details that investors should focus on when the company releases its earnings today. According to analysts’ estimates, Facebook monthly active users will total 2.28 billion in the third quarter, up from 2.23 billion in the previous three months.

Its third quarter revenue may jump 34% to $13.8 billion from a year earlier. Operating profit will be $5.79 billion, according to analyst estimates compiled by Bloomberg.

Facebook is still the most sought-after platform for advertisers in the social media sector. As long as Facebook can keep users coming back to its network, advertising dollars will likely continue to flow, giving the company room to invest in solutions for its problems.

Still, the company has a rough path ahead in order to prove that it can regain strength. With shares now trading close to the stock’s 52-week low, 35% below its high for the period of $219, investors are concerned that use of its main social network has plateaued, while future sources of growth, such as messaging, will be less profitable.

Additional bad news for the company: Q3 was another quarter of turmoil for Facebook. It included executive departures, another huge privacy breach, threats of deeper regulation, and struggles to contain misinformation on the platform, ahead of key mid-term elections in the US.

Three months ago, Facebook stunned Wall Street with a second quarter revenue miss and a warning that growth would slow while spending would rise. Later today, investors will be watching user engagement numbers and expenses very closely. More than anything, investors are hoping there won’t be any more nasty surprises.

“As long as management doesn’t surprise with more negative announcements about long-term revenue and expense trends, we think the stock could have a good 4Q,” Macquarie analyst Ben Schachter wrote in a recent note to clients.

Bottom Line

Facebook monthly active users are expected to total 2.28 billion in the third quarter, up from 2.23 billion in the previous three months, according to analyst estimates compiled by Bloomberg. If Facebook can show that users are still returning to its social network, its stock will resume its upward journey.

However, we don’t see that happening in 2018. Investors are advised to stay on the sidelines until we can confidently say that the worst is over for this social media giant.

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