Facebook Earnings: Expect Some Cooling

The social network put up some impressive numbers in Q2. Can it impress again?

| More on:

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 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.

More on Tech Stocks

sale discount best price
Tech Stocks

2 Growth Stocks to Buy Every Time They Go on Sale (Like Now)

The right growth stocks are worth buying in almost any market, but they are especially attractive when they come with…

Read more »

stock data
Tech Stocks

Better Tech Trend for Investors: AI or Graphene?

Even though it’s the newer of two technologies, AI has outpaced graphene by a significant margin in the corporate world.…

Read more »

Man considering whether to sell or buy
Dividend Stocks

DND Stock: Buy, Sell, or Hold?

DND stock (TSX:DND) fell by 17% after producing earnings that once again fell below analyst estimates. But does that mean…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

This Stock Is up 1,440%, But You Can Still Buy it

Constellation Software is a superb company that has made its long-term investors incredibly rich. And it's a good value today.

Read more »

Car, EV, electric vehicle
Tech Stocks

Tesla and Apple Have This 1 Trait in Common, and It’s Making Investors Rich

Tesla and Apple have a lot in common. But this one trait of building an ecosystem is boding well for…

Read more »

Upwards momentum
Tech Stocks

Growth Stocks: A Once-in-a-Decade Opportunity to Get Rich

Here’s a really attractive Canadian growth stock you can buy now and hold for the long term to see your…

Read more »

ETF chart stocks
Tech Stocks

You Don’t Have to Pick a Winner in AI Stocks: Here’s Why

Buy the sector instead of hoping for a moonshot.

Read more »

tsx today
Tech Stocks

TSX Today: What to Watch for in Stocks on Thursday, September 21

Overnight declines in commodity prices and fears of elevated interest rates for longer could drive TSX stocks downward at the…

Read more »