Facebook earnings preview

Facebook (FB) reports Q2 earnings on 28 July at 06:00 AEST and it should be a stock on every equity traders’ radar.

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Source: Bloomberg

This is a brilliant business that has a strong focus on its core operations and comes with an outstanding growth profile and a number of earnings kickers that could see further share price appreciation.

It has an incredible history of beating earnings expectations, having beaten consensus EPS (earnings-per-share) every quarter since May 2013 and having only missed revenue expectations once since July 2012. In the last three quarterly earnings reports we have seen the share price rally an average of 9.1% on the day of announcing. Obviously, past performance doesn’t predict the future, but if we think in probabilities then one suspects this trend should continue. Saying that, expectations are far more elevated this time around, and one could even make an argument that we are at peak sentiment towards this name. That should be a consideration as part of every trader’s risk management.

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In terms of numbers to look out for, the street is expecting EPS (adjusted) of 81.3c, on revenue of $6.00 billion, which is an 11% gain quarter-on-quarter. The market is also expecting unbelievable operating margins of 85.5% showing just how effectively they are monetising their operations. Monthly Active Users (MAU) are expected to increase 3% on the quarter to 1.7 billion. These are just staggering numbers.

Of course, it’s not just Q2 earnings numbers that traders will be keying off. For Facebook to really cause a positive reaction, we will need to see strong guidance for its Q3 numbers. With this in mind, the market expects 3Q total revenue of $6.555 billion, with mobile advertising making 82% of this total. EPS is expected to rise to 86c.

Traders will also be keen to understand the value of WhatsApp, Messenger and Instagram, which many believe are undervalued by the market.

Technically, the closing break of the May high of $121.06 creates an opportunity for $130.00 with the momentum clearly to the upside. Any modest earnings disappointment, however, where the overall investment case doesn’t change would suggest buying pullbacks into the $110.00 to $108.00 area, with a stop loss on a daily close below the 200-day moving average (currently at $106.99).

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