The Motley Fool

Facebook Earnings: Expect Some Cooling

In 2019, Facebook (NASDAQ: FB) has continued to grow its revenue rapidly. But the company’s bottom line has suffered as it faced steep legal expenses related to a settlement with the Federal Trade Commission (FTC) and heavy investments in privacy protections. Even these headwinds for earnings, however, weren’t enough to keep investors from being optimistic about the stock. Despite these bottom-line challenges, Facebook’s earnings have ultimately been better than feared — and shares have subsequently surged. The stock is up 37% year to date.

While the stock’s strong performance is nice for investors, it means the company will have to deliver impressive third-quarter results to justify this surge. Ahead of Facebook’s third-quarter update on Oct. 30, here’s an overview of a few areas investors may want to check on.

Revenue growth

When Facebook reported its second-quarter results, the biggest surprise was an acceleration in revenue growth. Going into the quarter, management had guided for revenue growth to decelerate during the period. Instead, second-quarter revenue increased 28% — up from 26% growth in Q1.

While this uptick was encouraging, management emphasized in its second-quarter earnings call that investors shouldn’t expect this trend to continue.

“We executed well in Q2 with a number of optimizations and product wins, particularly with the Facebook app that fell in our favor and help combat the overall trend of deceleration,” CFO Dave Wehner said during the call. “However, we continue to expect that our constant-currency revenue growth rates will decelerate sequentially going forward.”

So investors should look for that deceleration. On average, analysts are expecting third-quarter revenue to increase 26.5% year over year, only a moderate slowing from the previous quarter.

Operating margin

Another key metric to watch when Facebook reports earnings will be its operating margin, or its operating profit as a percentage of revenue. In Q2, this figure fell from 44% in the year-ago period to 27%. But management said the figure would have been 39% if it weren’t for its $2 billion accrual in connection with its settlement with the FTC.

While management didn’t provide specific guidance for its operating margin for its third quarter, the company has said that it expects its overall 2019 operating margin to be lower than it was in 2018 as the company invests in important initiatives like privacy, content safety, product infrastructure, and video. So investors should expect more year-over-year contraction in this key metric.

Facebook will report its third-quarter results after market close on Wednesday, Oct. 30.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.