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Facebook & Twitter earnings preview

Social media icons Facebook and Twitter update the market early next week, with both stocks having done well since their last quarterly updates.

Facebook app on a smartphone
Source: Bloomberg

Facebook

The doyenne of social media is expected to report earnings of 40 cents per share on $3.1 billion in revenue. Over the year so far, the stock has massively outperformed both the Dow Jones and the NASDAQ, up 46.5% versus gains of 0.8% and 6.52% for the two indices.

A recent report from Facebook partner firm Nanigans indicated that Facebook continues to see a steady increase in click volumes and greater ad value for advertisers. There are several features to look out for in the next report:

Autoplay video ads: this quarter will see the first mention of the impact of these. The cost is estimated to be between $1-2.5 million, so advertisers clearly believe that the cost is worthwhile (even if I have changed the settings in my feed to disable the autoplay).

World Cup: although it seems a long time ago, the football world cup did last into the beginning of this quarter. Daily average use in Q2 was much higher during the football period, so some of this is likely to carry over into the upcoming report.

Atlas: tracking platform Atlas will also be an interesting acquisition to watch. It allows greater tracking of users and thus improved ad targeting. By connecting campaigns to offline sales Facebook can offer advertisers a better experience, all designed to help defeat Google in the ad battles.

In the previous two quarters Facebook exceeded estimates by 39% and 16% respectively. With the heavy prevalence of new ad software in this earnings report, the possibility of a third successive beat is entirely possible.

Twitter

Expectations are for Twitter to report earnings of 1 cent per share on revenue of $350.91 million. The average move on the day of results has been 17% for the stock, so it is likely to be a volatile day whatever the actual figures.

The bounce in Twitter’s share price will have caught many by surprise. The third-quarter earnings report is going to be a major event that will determine whether the rally continues or whether it comes to a juddering halt.

Twitter’s own unique adjusted profits metric allowed it to post a profit for the second quarter of 2 cents per share, versus expectations of a loss. However, the company still trades on a forward earnings multiple of 130 times, meaning that any disappointment will be very poorly received.

Broadly, the company still faces declines in user growth rates, while the monetisation aspect, a big problem for Facebook until well after its IPO, is still likely to dog Twitter.

The rally to $55 was halted last week in the general market volatility, but the uptrend still holds. If we can maintain a price above the 50-day moving average then there is still a possibility that we can retest the October high, with a new upside target around $58.30. On the downside the August lows at $43.10 are an immediate target, followed by $36.80.

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