Facebook Q4 2018 earnings – Outlook in question

Facebook Inc. announces their Q4 2018 earnings on January 31, after the market closes.

Following two consecutive quarters of revenue decline from a stellar first quarter, accompanied by rising costs, the fourth quarter is not expected to deviate significantly from the trend. However, any increase in engagement and monetisation from Facebook’s core components will still be one to watch alongside the management’s outlook.

Slower revenue growth, higher costs

Q2 2018 results out of Facebook had been followed by a one-day 17% plunge in prices on July 26, as the surprise downturn in revenue growth and poor guidance weighed. Specifically, Chief Financial Officer David Wehner outlined ‘high single-digit percentages’ decline for total revenue from prior quarters for Q3 and Q4 while expenses are also expected to increase in 2019, altogether painting a negative picture for Facebook’s performance. As heard through the Q3 earnings call, this forecast had been reinforced for Q4. Reasons cited for this poorer outlook includes the slower monetisation of product services and in certain geographies, impact of data privacy initiatives on pricing growth and displacement of ad opportunities from focusing on growth of new products. Some of these new products mentioned includes the likes of the IGTV and Facebook Watch.

Amid the attempt to garner more growth opportunities in the new year while dealing with the aftermath of the regulatory storm, Facebook is expected to continue grappling with the theme of slower revenue growth and higher costs in the current iteration of earnings release.

Refinitiv estimates currently place the median revenue growth forecast at 26.4% year-on-year to $16.4 billion. Earnings per share that had surprised the previous round is expected to grow further from $1.76 to $2.19, ones to watch for deviations for price reactions.

Redeeming factors to watch

The above said, one would recall Facebook experiencing a winning streak in early January with JPMorgan stepping in to address the social media giant as one of its ‘2019 Best Ideas’. The recommendation had been made on the back of healthy user metrics, as surveyed by the firm, while also highlighting that the ‘revenue deceleration is manageable’. Whether such a view would be shared by the market would depend on several factors, namely the upcoming daily active users and monthly active user’s statistics to attest the success of the company’s new growth components.

At the same time, the management outlook would also be pertinent to the market’s perception on Facebook’s growth potential despite their current favourable valuation.

Trade Facebook’s earnings

Facebook, alongside the broader market, had experienced a reversal after the Christmas holiday. This had placed a halt to the downtrend established since the Q2 earnings release. Meeting resistance once again reached the April and October 2017 lows of around the $150 handle, look to the upcoming earnings release to refresh investors attitude towards Facebook. As per earnings release around the period where US and China will be holding high-level trade talks, watch for repercussions alongside the earnings performance. The next resistance seen for apple is set ahead at around $170.20, while support comes in at the $140 level ahead of the current consolidation zone support of $127.06.

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