Can Facebook’s earnings rescue its battered stock?

Facebook will release its earnings for Q3 2018 after Wall Street’s closing bell on Tuesday. The consensus recommendation for the
firm is a “buy”, matching the average recommendation for the Online Services peer group. Earnings aside, investors will also dissect active user growth to determine whether recent privacy issues are manifesting into reduced user engagement, and listen closely to management guidance for updates on the security and regulatory fronts.

The California-based social media behemoth is anticipated to report earnings per share (EPS) of $1.47 in the third quarter, according to analysts submitting their forecasts to Thomson Reuters. If accurate, this would represent a decline of 7.3% from the same quarter last year, when each share earned $1.59. Investors will be dissecting much more than the earnings figures though, perhaps most notably revenue growth. Revenues are expected to clock in at $13.78 billion, which if confirmed would mark a 33.4% surge from Q3 2017.

Separately, how quickly monthly and daily active users are growing will be closely scrutinized. These are likely to be used as a gauge of whether data privacy concerns are beginning to manifest into reduced user engagement, and thus potentially less demand for advertisements, in light of recent privacy (like the Cambridge Analytica case) and hacking scandals. Considering that the firm has already announced it will step up its security investments to safeguard against similar occurrences, this is also likely to also raise costs in addition to curbing revenues, thereby dragging further on profits.

Indeed, worries around privacy have likely been one of the key factors weighing on Facebook’s stock lately, which is sharply underperforming the broader market – lower by 17.6% year-to-date (YTD), and down by more than 33% from its all-time high reached in July. For comparison, the benchmark S&P 500 is down by a marginal 0.6% YTD while the Nasdaq 100 is higher by 7.1%; Facebook is a constituent stock in both of these indices.

Staying on privacy issues, the looming risk of greater regulatory burdens should not be underestimated as well, and is probably another key reason behind the stock’s troubles. Besides having to comply with user-protection regulations like the GDPR in Europe, and growing calls for something similar in the US, Facebook may also be staring down the barrel of monopoly laws, according to recent remarks from Germany’s antitrust watchdog.

After the earnings are released, the company’s leadership will host a conference call with analysts to discuss the report and provide guidance for the future. It will be interesting to hear the executives’ thoughts around these matters, with any major announcements having the capacity to impact the stock’s price.

Turning to the market reaction, an overall upbeat earnings report could help Facebook’s stock recover some of its latest losses. Potential resistance to advances could come near $160.5, the peak of October 17, with an upside break opening the way for a test of the September 26 peak, at $172. Even higher, the bulls could stall near $188.3, this being the top of August 7.

On the flipside, a disappointing report or downbeat guidance by management could see renewed selling interest for the stock, with a first barrier to declines likely to be seen around $144, the October 26 low. If the bears pierce below it, that would mark a new 1½ year low, and may see scope for a test of the $133.5 zone, defined by the peaks of October 2016. Lower still, buy orders may be found near $123, the high of November 22, 2016.

As for valuation considerations, Facebook’s 12-month forward price-to-earnings (P/E) ratio currently stands at 18.65, which is quite reasonable when compared to other tech companies of similar size. This ratio denotes the dollar amount someone would need to invest in order to receive back one dollar of annual earnings and hence, the higher it is, the more “expensive” a stock is considered to be. Facebook’s has declined notably recently alongside the stock price, and although it may still get a little “cheaper” from here, it is nevertheless becoming increasingly attractive.

Finally, other major corporations releasing earnings on Tuesday include Ebay, Pfizer, Mastercard, Coca Cola, Under Armour, and Electronic Arts.