Facebook Q3 earnings preview: what next for the share price?

When is Facebook’s results date?

Social media giant Facebook is set to report third quarter (Q3) earnings after the market close on Wednesday 23 October.

Facebook’s revenue up 28% but profit down 50% in Q2

Almost a third of the world’s population spent time on one of Facebook’s platforms in June – Facebook, Instagram, WhatsApp, Messenger – so it’s important to view the earnings report in that context. There isn’t another company, except for Google and perhaps Amazon, that can claim that kind of widespread engagement with its products.

The prime issue Facebook faces going forward is increased regulatory scrutiny – the company has until now been almost entirely free of costly regulatory burdens – and this has in turn been partly driven by revelations that Facebook has sought to aggressively monetise information about its customers at the egregious expense of their privacy.

Last quarter Facebook agreed to pay a $5 billion fine related to revelations it had inappropriately shared client information, a major scandal that has occupied the Facebook c-suite since last year.

The privacy issues have been at the core of a big mismatch lately between top-line revenue growth and bottom-line profit growth. In Q2 revenue growth was 28% year-on-year (YOY) versus a profit contraction of nearly 50%. Driving the mismatch, primarily, has been heavy spending by Facebook on privacy protection and security.

Despite regulatory scrutiny, Facebook is expected to see 26% revenue growth in Q3

For Q3, Facebook is expected to see YOY revenue growth of about 26% to $17.4 billion, while profit growth is expected to resume, though at a much slower pace than revenue. Earnings per share (EPS) is expected to grow 8% YOY to $1.91.

Closely watched at Facebook are the numbers the company releases about client engagement on the company’s various platforms, largely because they can give an insight into growth, but also because of the insight they give into Facebook’s very lucrative advertising business. Facebook controls about 22% of the fast growing digital ad market.

Last quarter, daily active users (DAUs) of the company's flagship Facebook platform increased 8% YOY to 1.59 billion, while monthly active users (MAUs) also grew 8% to 2.41 billion. Key will be whether Facebook will be able to show meaningful increases in use by its core Canada/US market, which hasn’t grown much of late. Growth has largely been coming from the least developed parts of the world.

Recent Facebook price action

Since Facebook reported Q2 in late July, price action has ranged from down about 14.5% to up slightly more than one percent. This month, Facebook, along with the other FANG complex of stocks, has rocketed higher, significantly outperforming the Nasdaq Composite Index, with Facebook up about 7.5% vs about 4.5% for the Nasdaq.

Facebook is still down, though, from late July, about 6%.